GEM GAZE - OCTOBER 2008

Gem gaze

The gems in the sectoral space continue to exhibit their lustre despite the radical changes on the diversified equity front and the stock markets…

DSPML TIGER Gem

DSPML TIGER with its impressive performance has seen a tremendous asset rise. There appears to be continuity in holdings in a significant portion of the portfolio while the balance is frequently churned. Out of the universe of 171 stocks invested in since inception (May 2004), 51 have appeared for less than six months. Stocks like Reliance Industries, ICICI Bank, L&T and BHEL have been long-time favourites. This large-cap tilted fund appears bloated with 60 stocks, but is an improvement from 72 (September 2007). The top five holdings comprise only 20% of the portfolio, while the figure is 35.75% for the top 10 holdings put together. Among various sectors, the fund has the largest exposure in energy (16%) and financial services (15.24) companies followed by basic engineering (11.36%), services 11.03% and metals & metal products (10.85%). The broad investment mandate, large-cap tilt, intense diversification and attractive returns have resulted in its asset base rise by 254 per cent last year.

Reliance Diversified Power Sector Gem

Reliance Diversified Power has not only generated returns superior to most other equity funds but has also demonstrated consistency in performance since its launch in April 2004. The fund’s return of 60 per cent since inception far outpaces its benchmark’s (India Power Index) return of about 40 per cent. At close to Rs 2,300 crore, the assets under management are significant but spread across only 18-20 stocks. Power generation is monopolised by the public sector and there are simply not enough sound power companies available. If the fund manager is restricted by the investment universe, he has ample flexibility on other fronts. His mandate actually permits him to invest the entire portfolio in not only equity, but also entirely in fixed income securities (of power companies and those related to the power sector). So this equity offering can well turn into a debt fund. With the mandate to even go 100 per cent in cash and equivalents, the cash holdings are significant if the fund manager does not find good investment opportunities. What is interesting is that the high cash holding has not dented the fund's performance. The fund manager is not restricted by market capitalisation either. While power stocks have undergone re-rating in valuations during the market rally in 2007, a good number of them have been beaten down during the recent market correction. However, unlike a few other sectors that are unlikely to regain their premium valuations, stocks in the power space continue to hold high earnings potential given the current macro scenario. For one, the peak power deficit situation remained at a high 14.6 per cent even as recently as the April-June quarter. This has prompted a recent revision in the capacity addition programme under the Eleventh Plan (up by 15 per cent to 90,000 MW). The additional planned capacity translates into new business for the entire spectrum of power companies. Two, even as the country failed to add even a single megawatt of nuclear power capacity between April-July (according to the CEA report), the waiver received from the Nuclear Suppliers Group is expected to throw open new opportunities. With prospects for the sector appearing strong over the next couple of years, this fund may be a good vehicle to ride the energy theme.

Prudential ICICI Infrastructure Gem

ICICI Prudential Infrastructure Fund, grabbed the top rank, with eight Indian equity funds ranking among world's top 10 best performing infrastructure funds in 2007, according to fund tracker Lipper. Over the past one year, the fund pruned exposure to sectors such as ferrous metals, construction, capital goods and oil. The power sector, which is expected to witness huge capacity additions, appeared to be the fund’s favourite as it nearly doubled allocation to this segment. It accumulated stocks such as NTPC and Tata Power over the past six months, resulting in a four-fold increase in holdings in each of the stocks. Allocation to banking space appeared sizeable in comparison to peers. Reliance Industries, a preferred stock for many a fund house, saw increased weight of 9.2 per cent to enter the fund’s top 10 holdings. The ferrous metals sector has been viewed cautiously by the fund. Allocation to the construction sector has not moved much relative to the increasing asset size while holdings in the cement space increased marginally. Bharti Airtel was the lone stock to represent the telecom space even as its holdings over the past six months almost doubled. These moves have stood the fund in good stead, the volatile markets notwithstanding.

DSPML Technology Gem

Despite the pounding that IT stocks received in the past one year, DSPML Technology has delivered strong returns, vis-a-vis its benchmark — BSE Tech — which it has bettered over one, three and five-year periods, making it the best performing technology fund. The fund has managed to beat its category convincingly time and again as a result of fund manager Apoorva Shah's radical moves. Faced with an appreciating rupee and fears of a U.S. downturn, he reduced the allocation to software service export companies and began to increase it to service and media stocks like Educomp Solution, Tata Teleservices and NDTV. The fund’s 82 per cent exposure to technology (January 2007) fell to 57 per cent (January 2008) while services (including media) were up at 32 per cent. The fund appears to have picked up stocks that have lower US centricity and those with lower exposure to the banking and financial services vertical. The other noticeable trend is exposure to companies in the fast-growing domestic IT training segment. Last year, it also steadily reduced its position in large caps and in March 2008, the mid- and small-cap exposure was at 72 per cent. The moves paid off well and the corpus of the fund swelled by 437 per cent last year. Infosys, TCS, Tech Mahindra, Rolta and Mphasis are among stocks that have stayed on. The portfolio consists of 49 stocks currently. Those interested in the telecom, media, technology and technology enabled sectors must give this fund a serious consideration.

The broad investment mandate and tactical moves by these gems have ensured perennial prosperity and enabled them to hold on to their esteemed status! Investors with an appetite for risk and a long term perspective can adorn their portfolio with these GEMs.