GEM GAZE - SEPTEMBER 2009

GEM GAZE

DIVERSIFIED EQUITY FUNDS

The entire team of Diversified Equity Funds in GEMGAZE 2008 have remained unscathed by the carnage in the stock markets. All the five funds have exhibited performance worthy of a gem in the past 12 months inspite of the free fall of the Sensex till March 2009. This, of course, is not an exhaustive list - several others have displayed scintillating performance…they will be under close watch for a further period of 12 months before they are elevated to the status of a GEM.

HDFC Equity Fund Gem

Steady in volatility…

HDFC Equity Fund’s long-term track record (over 14 years) in delivering steady returns and its ability to consistently contain downsides has enabled the fund to consistently better the performance of its benchmark — the S&P CNX500, over one-, three- and five-year periods during periods of market volatility. Even in the protracted correction of 2008, it outperformed the S&P CNX 500. HDFC Equity’s five-year return on a compounded annual basis is 17.2%, which places it among the top ten percentile of diversified equity funds.

The fund takes a multi-cap approach to investing in stocks. Though heavy on large-cap stocks (over 60% of the portfolio), it invests substantially in mid- and small-cap stocks as well (over 30% of the portfolio). A sharper large-cap focus may be a fair call, given that such stocks may have better earnings visibility. Together with a significant mid-cap exposure, where stocks are available at attractive valuations, albeit with some business concerns, the fund may be able to gain from broader market rallies. HDFC Equity remains mostly fully invested across market cycles and does not sit on significant cash positions to take cover from market volatility. The fund consistently has cash positions of 1-7% of the portfolio. The number of stocks over the past year increased from 42 to 49 in March 2009. The fund’s March 2009 portfolio reveals that it has high exposures to defensive sectors. Pharmaceuticals and consumer non-durables, in addition to banks, are among the top few sectors held by the fund.

HDFC Equity Fund has been awarded the 'Best Fund over Ten Years' in the 'Equity India Category' (form amongst 34 schemes) by Lipper Fund Awards India 2009.

The fund is suitable for investors wanting to build a long-term portfolio and looking for steady rather than spectacular returns.

Magnum Contra Gem

Beating the benchmark…

This decade old fund has been a star performer with an excellent return of 27.6% since launch. It has exhibited a strong 5-year return of 27.4%, beating its benchmark by an astonishing 15%. Over a three-year period, the fund generated a compounded annualised return of minus 1.5% but declined 1.1 percentage points lower than its benchmark. Over a one-year period, the fund’s NAV declined 30% but the fund contained downside better than the benchmark. It achieved this by moving one-fourth of the assets into cash and debt over the past few months.

The fund sports a well-diversified portfolio. According to the March 2009 fact sheet, it had 73 stocks in its portfolio. A good number of these stocks in the portfolio participated in the recent rally. The top ten stocks accounted for 34% of the assets with large caps cornering 63% and mid and small caps accounting for 20% of the portfolio. The fund has limited the exposure to a single stock to about 6%. While the fund is adequately invested in equities most of the time, (87% on an average), it did reduce this exposure between October 2008 and January 2009 when the equity market was in turmoil, and preferred to invest in money market instruments. Its cash levels had thus nearly doubled from the average cash holding of about 10%. However, with the revival in the equity market, the fund is gradually getting back its original form and has reduced the cash level to about 14% as on April 2009.

While the name suggests that it is a contrarian fund, it is by and large managed like a diversified equity fund. With smart tweaks to the term contrarian, the fund captures the length and breadth of the market. So, unlike a typical contrarian fund that targets out-of-favour (flavour) stocks, Magnum Contra considers the underlying company’s valuations and compares that to what it believes the true valuation should be and then takes a call as to whether to invest in it or not. This does not suggest that the fund does not play on genuine contra bets – it does and this strategy has brought out the winner in the fund time and again. This fund is a perpetual winner.

ICICI Prudential Dynamic Fund Gem

Defensive Play …

Over the past three years, the fund has managed to beat the category average in every downturn. But its defensive strategy could prove to be a hindrance when the market is on a roll.

This is a “go anywhere” fund that invests in large, mid and small cap stocks. The fund adopts defensive investment approach and is overweight on sectors like fast moving consumer goods, pharmaceuticals, etc, during bearish market conditions, while avoiding expensive sectors where bubble exists, during bullish market phases. The portfolio manager shifts the fund’s portfolio into cash during market downturns in order to protect the fund’s downside. Currently, in view of the volatile market conditions, the fund manager has hedged 20% of the fund’s portfolio.

ICICI Prudential Dynamic Fund is ICRA 5 star Gold Award winner for 2009 in the five-year category.

Defensive stock selection and investing in companies - which do not have any significant funding requirement and are demand driven - will help the fund to outperform the market and deliver optimum risk-adjusted returns. Over the long-term, the fund has displayed a decent performance with its excellent defending capabilities during the market downturns. ICICI Prudential Dynamic is a fund for the downturn.

DSP Black Rock Equity Fund Gem

Truly diversified…

(In November 2008, DSP Merrill Lynch Mutual Fund has been renamed as DSP Black Rock Mutual Fund as a result of the global merger of Merrill Lynch’s AMC business with Black Rock.)

Having been in existence for over a decade, DSPBR Equity is a well-diversified fund and generates returns in a consistent manner. The returns of the fund, since launch, is an excellent 24.6%. The fund has a strong five-year return of 33.4%, beating its benchmark by an impressive 8.4%. With no market capitalisation or sector bias, DSPBR Equity goes about generating returns in a fairly consistent fashion. Like many of its peers, it hit a rough patch during 2000-02, but ever since 2003, it has beaten the category average every single year. In the bear phase spanning January 8, 2008 to March 9, 2009, it shed 49.5% (category average: 55%). But when the market began to rise in March 2009, the fund was not quick in lowering its cash allocation and did so mainly in May 2009. Neither was it heavy on construction, metals, or financials, which boomed during that time. As a result, the fund delivered 79% (category average: 89%) between March 9 and August 31, 2009.

A unique aspect of DSPBR Equity is its rigorous diversification. The fund’s exposure to the top 10 holdings does not generally cross 35%. The cash/debt component in the portfolio has been consistently little over 10%, which suggests that the fund prefers to remain invested in equities albeit with large diversity rather than sit on cash and wait for opportunities. The number of stocks in the portfolio has been trimmed over the last one year. From over 80 stocks over a year ago, the number of stocks in the portfolio in February 2009 is 67. The diversification in terms of sectors invested is quite high, with as many as 26 of them in the portfolio. Further, the fund appears to have adopted a defensive approach in recent times with consumer non-durables, pharmaceuticals, and software being among the top few sectors held.

The multi-cap exposure, broad diversification, and consistent returns are what make this fund a good pick.

Birla Frontline Equity Fund Gem

Consistency is the name of the game…

Birla Sun Life Frontline Equity Fund has been one of the leading performers across market cycles which include surging bull market, crashing bear market, and a fledgling new rally. It has been among the best performers in the diversified equity fund category over past 3 years with CAGR returns of 18% versus 11% from BSE200 Index, as on June 30, 2009. On a one-, three- and five-year basis, BSL Frontline has consistently outperformed its benchmark BSE 200, by 5-11 percentage points.

Birla Sun Life Frontline Equity Fund’s performance is attributable to dynamic sectoral allocation in the portfolio, stock selection, and timely market calls. In the recent past, the fund reduced its level of cash holdings from 15-20% to 6-7%. It was an early mover into infrastructure and capital goods stocks which have now become market favourites. Another significant bet has been on the financial sector, which is benefiting from a crash in short-term interest rates and a steep upward sloping yield curve. Its strategy of not betting blindly on defensives early on and maintaining cash levels helped it to build positions aggressively. It has also been taking exposures to derivatives from May 2008. The portfolio is well-diversified with 56 stocks (June 2009).

Birla frontline Equity Fund is an ICRA 5 star Gold Award winner in the one-year and five-year categories.

A well-diversified portfolio tilted towards large-cap stocks with decent long-term returns makes the fund a stable offering.

Diversified Equity Funds have stood the test of time – tough times and otherwise. These glittering GEMs bear testimony to this time-tested truth…