GEM GAZE - FUND OF FUNDS

GEM GAZE

Resilience lowers risk…

Looking for a lower-risk alternative to a pure equity fund? The Fund of Funds may fit the bill. The resilience displayed during the recent downturn raises its position as a priced possession in an investor’s portfolio. Fund of Funds primarily provide a reasonable hedge against protracted market declines. With very little expectation of a quick revival in the stock market, FOFs could provide some balance to a flagging equity portfolio.

The glittering gems listed below have outsmarted their category average which has catapulted them to this envious position. Four of the six gems listed last year have the distinction of maintaining their position. FT India Dynamic PE Ratio Fund, by displaying the much needed resilience, has been accorded the status of a GEM while Kotak Equity FOF has failed to live up to investor’s expectations. Optimix Asset Allocator’s excellent performance in its short stint has enabled it to topple its counterpart Optimix Equity and attain the status of a GEM.

FT India Life Stage Fund of Funds Gem

Flair for life

The FT India Life Stage Fund of Funds are among the better performing equity oriented funds of 2008 — a loss of NAV of about 39 per cent for the year. That may seem an unimpressive show in absolute terms, but still much better than the equity fund category, which has lost 55 per cent in value for the year. This is mainly explained by the fund’s large-cap orientation and a 20 per cent debt exposure, which has protected the capital. The funds re-balance their portfolio to maintain their fixed allocation, at six-month intervals. The funds’ ability to contain downside well in the choppy markets of 2008 has given it a leg up in the recent return rankings. A very conservative strategy of maintaining a low portfolio maturity in recent months appears to have limited the potential for gains from tumbling bond yields. However, given that the interest rate environment is likely to remain benign for some months to come, there appears to be potential for improvement in returns through a more aggressive stance over the next few months.

ICICI Prudential Advisor Series Gem

Promise of potential

Prudential ICICI Advisor series is an open ended asset allocation fund, which is of the nature of fund of funds, with a one-year return of -25.45%, a spectacular return in relative terms. Its return for the fortnight ended 6 February, 2009 is actually positive at 2.6%. There was a change in the fund manager as recently as September 2008, with Rahul Goswami taking over the reins.

Birla Asset Allocation Plan Gem

Brilliant at the battlefield

The fund has established a comprehensible trend of performing well in difficult market conditions. Its three-year return of 6.5 per cent compounded annually over the last three years outperformed the diversified-fund category average of -1.5 per cent. However, the plan’s historical chart hints that its performance during sharp rallies is considerably below average compared to equity-category returns, suggesting that its show may not be consistently superior across market cycles. Over the last year, it has declined by 26 per cent as against its benchmark return of -37 per cent. Its performance was also superior to similar FOFs which have declined between 26-51 per cent over a similar period. The fund’s equity portfolio appears to hold a value strategy what with higher exposures to sectors such as IT and financial services, that hold attractively valued stocks. The fund’s debt portfolio also attracts attention for its strategic mix of short-term, income and bond funds from the Birla stable. The fund’s quick shift to debt in the correction of 2006, 2007 and now have aided the fund create a cushion against equity declines.

Fidelity Multimanager Cash FOF Gem

Cashing in on composition

Fidelity Multimanager Cash Fund has been able to retain a positive return in view of the composition of its portfolio - 20% each in HSBC Cash Institutional Plus, HDFC Cash Management Savings, Birla Sun Life Cash Plus Institutional and ICICI Prudential Liquid Super Institutional and current assets. Its one year return is 8.4%

Optimix Asset Allocator Multimanager FOF In

Optimum Output

OptiMix Asset Allocator Multi Manager Fund of Fund packs a combination of tactical asset allocation and fund selection. The OptiMix Asset Allocator not only chooses funds based on performance and manager skills, but goes one step further in also determining the allocation between equity and debt. Unlike balanced funds, which tend to be tilted towards either debt or equity, this fund shifts between 100 per cent equity and debt based on a mechanical model designed to predict intermediate market trends. This fund does its asset allocation based on the PE levels of the market. But it uses an in-house tool called the limited loss moving average (LLMA) to identify changes in market direction. The fund has protected the downside risk and delivered decent returns in upswings.The fund has not always cut on equities at high PE levels. It has generally maintained a high equity allocation during market upswings and high PE levels and has cut the allocation as and when the market has slipped. Optimix Asset Allocator has delivered a return of about 12 per cent since its inception beating its benchmark: the Crisil Balanced Fund Index by about two percentage points. Top performing balanced funds have returned twice as much since. However, much of their outperformance can be explained by the heavy bias to equity. OptiMix Asset Allocator has managed to beat the average debt-oriented balanced fund. OptiMix Asset Allocator was almost fully invested in equity during the initial months after its launch. Since February, however, its exposure to equity has declined to less than 25 per cent. The lower allocation to equity appears to have coincided well with the market correction that began in early February. However, the FoF appears to have been waiting by the sidelines since then, with a substantial cash/liquid fund allocation. The allocation to debt has been limited to liquid funds, probably as the fund waited to take advantage of opportunities in the equity market.

FT India Dynamic PE Ratio FOF In

Dynamism overcomes downturn

FT India Dynamic PE Ratio FOF follows a dynamic and systematic asset allocation strategy. The fund changes its asset allocation based on the weighted average PE ratio of the NSE Nifty Index. At higher PE levels, it reduces allocation to equities in order to minimise downside risk. The fund clearly adheres to its strategy. If the PE of the Nifty falls below 12, the fund will be fully invested in equity. If the PE rises to above 28, it will translate into it being fully invested in debt. In doing so, the fund has clearly attained its objective of downside protection during a market downturn. While the Sensex lost nearly 50%, it lost just 24%. On the flip side, in a rising market, as the equity exposure gets reduced, the investor may have to compromise on returns. Its options are limited to just Franklin India Bluechip Fund, an open-end diversified equity scheme and Templeton India Income Fund, an open-end income fund.