Strategy for equity-oriented mutual funds A lot has been written about the ‘India story’ and how investors stand to benefit from it. One way to do so is to invest in the corporates (via equity markets) which are in the forefront of the India story. However investing in equities can be a tricky proposition for retail investors. Understanding equities is a complex process and requires in-depth knowledge on areas like macro economics, government policies, interest rate environment and access to detailed and precise information about the corporate in question. In other words, equity investing is a full time activity. Conversely, investors have the option of utilsing the mutual funds route for accessing equity markets. Mutual funds offer investors the opportunity to benefit from expert fund management skills of the fund manager at a nominal cost; as a result the investor can afford to play a more passive role. In this article we present our recommendations from the equity-oriented funds segment i.e. diversified equity funds and balanced funds. personalfn follows a stringent selection process while selecting funds for its recommended list. While conventional wisdom suggests that ‘returns’ is the parameter to look for, in our view it is simply one of the many factors to be considered. We look for funds which are consistent performers over the long-term horizon (for example, at least 3 years in the case of equity-oriented funds). Similarly greater emphasis is placed on the fund’s performance during a downturn in equity markets. We believe a fund house needs to pass muster before any of its schemes can be considered for recommendation. We look for fund houses which are also strong on systems and processes vis-à-vis the ones where fund managers call all the shots. Of course, the fund manager is given his due importance as well; our one-on-one interactions with fund managers give us an insight into his philosophy and mindset. personalfn studies the fund’s portfolio management style. The stock selection, consistency of holding, top holdings and sectoral concentration are all put under the scanner and regularly monitored. Likewise, we believe that a fund must religiously adhere to its investment mandate at all times irrespective of market conditions. Funds with a fluid investment mandate or those investing contrary to their stated mandate are strictly avoided. Only funds which deliver goods on the above criteria and do so consistently make it to our recommended list. Diversified Equity Funds
(The Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument) (Standard deviation highlights the element of risk associated with the fund.) 1. HDFC Equity Fund Fund Profile HDFC Equity Fund (HEF) is an open-ended diversified equity fund from HDFC Mutual Fund. HEF is a high risk – high return investment proposition and has an enviable track record to show for. The fund is managed by Mr. Prashant Jain, one of the most celebrated fund managers in the country. Portfolio Strategy The fund’s portfolio management style epitomises its high risk nature. HEF’s portfolio is characterised by concentrated stock and sectoral holdings. Also the fund invests in stocks of both the large and mid cap varieties. Concentrated stock holdings can expose a diversified equity fund to high levels of volatility; however HEF has uncannily managed to pitch in a reasonable performance on the volatility control front. Why you should invest in the fund Foremost, the fund’s ability to clock impressive returns and deliver consistently over a period of more than 10 years deserves merit. Secondly, despite holding a concentrated portfolio, the fund has managed to keep volatility in check. Also HEF’s portfolio management history throws up numerous noteworthy instances, for example the fund’s decision to exit the technology before the 2000 TMT meltdown among others. 2. Franklin India Bluechip Fund Fund Profile Franklin India Bluechip Fund (FIBF) is among the leading diversified large cap equity funds in the country. Its impressive run over more than a decade underscores the competence of its fund management team. Mr. K N Siva Subramanian, one of the more respected names in the Indian mutual fund industry, has been managing the fund since inception in 1994. Portfolio Strategy FIBF is managed aggressively (concentrated stock and sector allocations), although the aggression has toned down over the years. From being a fund that rarely had more than 20 stocks in its portfolio, it now maintains a portfolio of about 30 stocks. One reason is that it has got more process-driven after being taken over Franklin Templeton Mutual Fund, which has served to introduce greater diversification in its investment style. Another reason is that FIBF’s net asset base has ramped up from less than Rs 10 bn (Rs 1,000 crores) to over Rs 20 bn in a relatively short period of time; this made the fund manager broaden his stock base to spread risks. One particularly interesting trait in FIBF is the rigid adherence to its mandate to invest only in large cap stocks. While most of its large cap peers have deviated to include a fair sprinkling of mid cap/small caps to ride the mid cap boom, FIBF has stayed the course. Why you should invest in the fund In our view, investors who want to begin investing in diversified equity funds should start with a fund like FIBF. The fund invests in large sized companies, which carry relatively lower risk vis-à-vis mid caps since they are well-researched and have a predictable growth pattern in terms of earnings. FIBF has the track record to back its credentials and its fund management has proved its competence in identifying trends well before the competition with the tech sector in 1998-1999 being a case in point. 3. HDFC Top 200 Fund Fund Profile HDFC Top 200 Fund (HTF) is among the better-managed diversified equity funds in India today. This is borne out by the fund’s impressive track record since 1996. HTF is also managed by Mr. Prashant Jain who is presently the CIO of HDFC Mutual Fund. Portfolio Strategy HTF pursues an index-plus investment strategy. It was among the earliest funds to adopt this style of fund management. According to this style, about 60% of HTF’s stock picks are sourced from the BSE 200 (its benchmark index); the balance 40% of assets are invested in stocks outside the BSE 200. Given the nature of fundamentally strong and liquid companies in the BSE 200, the fund’s portfolio assumes a solid look. Over the years, the fund manager has used the flexibility to invest 40% (of assets outside the index) judiciously to outperform the index and peers. Why should you invest in the fund HTF’s index-plus investment strategy has delivered the goods over the years; its solid track record bears testimony to this fact. The fund has made several judicious investment decisions in the past like exiting the technology/media/telecom sectors well before the meltdown in March 2000. Identifying PSU oil stocks earlier on is another decision that paid off. 4. Franklin India Prima Fund Fund Profile Franklin India Prima Fund (FIPF) holds the distinction of being the country’s first mid cap fund. Mr. Siva Subramanian (Senior VP and Portfolio Manager - Equity, Franklin Templeton) manages the portfolio for FIPF. Investors with a flair for high risk – high return investment avenues should consider adding the fund to their portfolios. Portfolio Strategy FIPF has been positioned as a fund which invests predominantly in mid and small cap stocks and the fund has been honest to its stated mandate. The fund’s equity portfolio tends to be a well-diversified one (generally more than 50 stocks) and displays a reasonable degree of consistency. FIPF’s top 10 stocks generally account for less than 40% of its net assets; in our view this is an ideal allocation. A top-heavy portfolio can expose the fund to volatility. In terms of sectoral holdings, FIPF’s portfolio tends to be a concentrated one enhancing its risk profile. Why you should invest in the fund FIPF has been a successful performer across time frames and cycles (market rise followed by a slump or vice versa) as is adequately displayed in its NAV appreciation. Also the fund house’s foresight in launching a mid cap fund a decade before its peers is perceptible in its portfolio management style as well. Finally, FIPF’s unique brand of fund management i.e. holding a well-spread stock portfolio while dealing with inherently risky propositions like mid cap stocks makes it a compelling investment proposition. 5. Principal Growth Fund Fund Profile Principal Growth Fund (PGF) is a predominantly large cap diversified equity fund from Principal Mutual Fund. A change in fund management helped the fund shrug off its indifferent start and emerge as one of the better performing diversified equity funds. The fund will be suited for investors with a medium to high risk investment proposition. Portfolio Strategy PGF invests a major portion (generally around 75%) of its assets in large cap stocks and the balance in mid cap stocks; a strategy that has held the fund in good stead. The fund’s portfolio tends to be a well-spread one across stocks; its top 10 stock holdings rarely breach the ‘40% of net assets’ mark. PGF has at times displayed the tendency to hold sectorally concentrated portfolio. The fund doesn’t hold a portion of its assets in cash/current assets when markets seem over heated or for a lack of attractive investment opportunities. Why you should invest in the fund Equity-oriented schemes from Principal Mutual Fund have been known for their ability to deliver on the risk-adjusted return parameter, PGF has also delivered on this front. Furthermore, the fund has managed to successfully perform the tricky balancing act of being an above-average performer on the returns parameter without exposing investors to high levels of volatility. 6. Sundaram Growth Fund Fund Profile Launched in 1997, Sundaram Growth Fund (SGF) is one of the most conservative equity funds in India. The fund has carved a niche for itself as a steady performer. This makes the fund ideally suited for investors with a moderate risk appetite. Portfolio Strategy SGF pursues a pre-dominantly large cap investment strategy. It adheres to well-defined processes, which limit its exposure to a particular stock and sector. It does not let its allocation to a single stock exceed 5%. If the exposure to a stock exceeds 5%, the fund manager has to necessarily trim the excess so as to bring it down to 5%. Likewise, its exposure to a single sector can only go 7% above or below that of the benchmark index (BSE 200). This ensures that the fund is well-diversified across stocks and sectors, a trait that proved particularly beneficial during the tech rally in 1999-2000 when most of SGF’s peers were undone by bloated tech/media/telecom allocations Why you should invest in the fund SGF’s biggest plus is a well-defined investment process that ensures it is well-diversified across stocks and sectors. This has paid rich dividends in the past, with the TMT slump in early 2000 being a case in point. The fund is not managed so as to be an out an out performer, which is why investors are likely to find its aggressive peers steal a march over it during a stock market rally. However, over a stock market cycle, investors will find SGF do a much better job than its peers. Balanced Funds
(The Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument) (Standard deviation highlights the element of risk associated with the fund.) (Equity: Debt holdings as on September 30, 2005) 1. HDFC Prudence Fund Fund Profile HDFC Prudence Fund (HPF) is easily the best balanced fund in India. It has built an impressive track record since inception in 1994. A measure of its popularity is the fact that it is the only balanced fund with net assets exceeding the Rs 10 bn mark (Rs 1,000 crores). This is another fund managed by Mr. Prashant Jain. Portfolio Strategy HPF normally maintains an equity component hovering around 65% (of net assets), although this number has gone up from the 60% ceiling it used maintain until a few years ago. Its stock picks are not churned heavily and embrace large caps as well mid caps. In terms of sectoral allocation, it pursues a concentrated investment strategy. Over the years, HPF has judiciously used the debt component to its benefit; for instance in late 1999 when most fund managers were busy accumulating technology stocks, the fund had reduced its allocation to technology and was busying bonds which had very attractive yields at that point in time. Why you should invest in the fund NRIs looking at investing in a balanced fund in India should first consider investing in HPF. The fund’s enviable track record and competent fund management track record are factors that make it an obvious choice for moderate risk investors. 2. DSP ML Balanced Fund Fund Profile DSP ML Balanced Fund (DMBF) is a medium risk – return investment proposition from the balanced funds segment. Investors with a moderate risk appetite should consider adding the fund to their portfolios. Portfolio Strategy The fund is mandated to hold approximately 60% of its assets in equities/equity-related securities while the balance (40%) can be held in debt and money market instruments. To the fund’s credit, it rigidly adheres to the stated limits. DMBF has a propensity to hold a well-diversified equity portfolio and also a fair degree of consistency can be seen therein. The fund’s risk-averse nature is adequately highlighted in its debt portfolio as well; the latter is dominated by high rated instruments (AAA or equivalent) coupled with a low average maturity. Why you should invest in the fund
The fund’s rigid adherence to its mandated debt-equity allocation despite being tested by rising equity markets deserves mention. Secondly, the fund’s stable fund management style and penchant for holding a well diversified portfolio (equity and debt) are noteworthy.
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