Articles

It has been six months since things turned around for the equity markets. The Lok Sabha elections provided a strong trigger in early March and apart from a few blips along the way, the returns on an average equity mutual fund at 91% over these six months are looking extremely impressive. To the lay investor, the current top five performing schemes may seem lucrative investment options. Moreover, it is common to find such schemes quoted in the print and electronic media. So we decided to scratch the surface and assess the characteristics and past performance of these top five performers.

Diversified equity funds are in abundance in the industry. Of the 168 open-ended equity diversified funds, we found that 77 funds have out performed BSE Sensex since March 9, 2009. While the BSE Sensex appreciated by 91.98%, these 77 funds gained 110.50% on an average. Moreover, with mid-cap stocks performing much better than their large-cap peers in the currentally, the top performers list is monopolised by mid- and small-cap oriented schemes. In order to assess performance in different market cycles, we have identified two bear phases - the first one stretches from February 11, 2000 to September 21, 2001 and the second, more recent one commenced in January 8, 2008 up to March 9, 2009. Similarly the bull phases have been identified as the first one lasting from September 21, 2001 to January 8, 2008. The current phase starting from March 9, 2009 and continuing till date has also been marked as a recovery phase. (The returns taken have been on absolute basis for less than one year and on compounded annualised basis for a period more than a year).

We found that of these five schemes, only one scheme - JM Basic - has been in operation through the four phases. Three of the schemes on the other hand were launched in the bull phase stretching from 2001 to 2008, while only one scheme - Principal Emerging Blue Chip was launched in the recent bear phase.

A look at the phase-wise performance reveals the worst - the performance of the four schemes (barring the recently launched Principal Emerging Blue Chip) was dismal in the bear phase through 2008. In fact, all the four schemes are ranked at the bottom of the performance charts!

After emerging as the third worst performer, JM Basic Fund has shot back to prominence with an astounding 150.8% growth registered in the last six months. Contrary to its performance in 2008, the scheme put up a much better performance in the bear phase ending September 2001. Even during the bull phase from 2001 to 2008, the fund emerged in the top 10 performing schemes. The fund is not suited for the nervy investor; severe ups and downs are to be expected here. Concentrated sector allocation is one of the fund's strategies, which on one hand produces stellar returns, but on the other hand also leads to much higher volatility in returns. For instance since January 2009, the fund has consistently allocated as much as 40% of its assets to the top two sectors! This is more than double of what an average diversified equity fund usually maintains.

At one point, it was not unusual to find 40-50% of the scheme's assets invested in a single sector. However, with the change in the management of the fund in December 2006, the strategy of the fund became more oriented to focus diversification. Wherein the number of sectors did increase and concentration levels decreased, relative to its peer group, it however, continued to remain an aggressive offering.

The scheme has completed four years of operations and has registered a negative growth of (-) 7.93% since its inception. Though it outperformed its benchmark BSE 200 in the initial period, it soon started lagging behind. In the bear phase of the past year (January 8, 2008 to March 9, 2009), the fund lost by (-) 81.45%, whereas BSE 200 lost (-) 58.97%. In fact, the fund only saw a revival in its returns in the rally of 2007. As the name suggests, the scheme is a pure mid and small-cap oriented fund since inception. The fund has been aggressively investing in equities over the years, with phases of restraint being exercised in the recent past.One of the prime reasons for the large losses suffered by the scheme in the bear phase was the large build-up of positions (23% of assets) in the housing and construction sector just before the equity markets crashed in January 2008. The sector was amongst the most over-valued at the time.The fund also stuck to its strategy to focus on the mid-cap space. At the same time, the investment strategy of concentrating on value stocks with lesser churn in the portfolio since October 2008 has proved to be a worthy strategy.

The scheme was launched in the midst of the bear phase in October 2008. The timing was perfect since the fund took the advantage of attractive valuations and since inception, has grown 129.4% as of November 12, 2008. In doing so, the fund has outperformed its benchmark CNX Midcap index. There is no way to check how the fund is likely to behave in the downturn. The fund keeps its strategy simple by looking at all kinds of investment opportunities in the mid and small-cap space, without any sector bias. It largely diversifies its assets over a decent number of stocks across a large number of sectors. The scheme maintained a defensive position in the early months of its inception as it invested a major portion of its assets in large-cap stocks, debt and held cash. The portfolio started looking more focused around February 2009 when the mid- and small-cap stocks emerged in the portfolio. Currently, the top five sectors account for 35.75% of the total assets. Banks, steel, realty and IT sectors gave superior returns to the fund in the recent rally. The scheme had been investing heavily in the banking sector since its inception, and allocation to the sector has only recently rationalised.

The scheme has been delivering above average returns through its inception. It has provided returns of 141.04% in the recent upswing, however, lost (-) 72.74% in the bear phase. The scheme intends to invest predominantly in a diversified basket of companies whose market capitalisation is between Rs 200 and Rs 2,000 crore. The limit for non-mid-cap stocks is 10% of the portfolio. Though the scheme comes across as an aggressive one as it aims to invest at least 65% of the corpus in the mid-cap funds all times, however, it has not followed this specified asset allocation as a large allocation to large-cap stocks is evident from the fund portfolios. The scheme has kept its asset allocation between debt and equity range-bound. The only allocation witnessed in the debt segment in the history of this scheme has been in the latter part of the recent bear phase. Since its inception in 2005, the fund took strong calls in the textiles sector with the peak allocation being 21% in August 2005. High concentration was also seen in the auto and auto ancillary, housing and construction, engineering, steel, and IT sector. However, the fund has abandoned the strategy of taking concentrated sector bets. Since the beginning of the year, some astute sector moves have led to the better performance of the scheme.

SBI Magnum Sector Umbrella - Emerging Businesses Fund has been in the industry for five years now and has performed extremely well in the recent upswing, but similar performance was not visible in the past. The scheme has delivered returns of 140.35% in the recent upswing, however, lost (-) 72.01% in the bear phase of 2008. The scheme intends to diversify assets across various emerging sectors with exposure to a particular business restricted to 25 per cent of the total investment portfolio and has maintained this stand with the exception of breaching the limit marginally in April 2008. In August 2007 the fund strategically reduced its exposure to mid cap stocks and began allocating more funds to large caps; however this did not reduce the losses incurred by the scheme. The fund follows a concentrated strategy of investing in specific sectors. Moreover, it is not unusual to find short-term positions being taken in specific sectors, with 10-15% of assets being assigned to such short-term positions. Throughout the recent bear phase, the scheme maintained an extremely large exposure to the housing and construction sector; wherein close to 25% of the scheme's assets were invested here. In fact, it is only after May 2009 that the exposure to the sector was rationalised to less than 10% of assets. The stocks within the housing and construction sector tend to be extremely volatile and most mutual fund managers are cautious when investing in the sector. Here again the volatility in returns is a matter of concern.

The current frenzy in equity markets has led to a revival in investor interest in mutual funds. But investors need to exercise caution. Return figures quoted, while accurate; reveal only a part of the whole story. It is important for investors to find a suitable investment style that closely relates to their investment profile. Funds with racy returns may not always be the appropriate choice for all kinds of investors.