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How these mutual funds scored 100%
Vinod Iyer
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April 24, 2006

It is one thing to ride a bull wave and quite another to keep pace in turbulent waters. As the relentless bull-run on the bourses carried the Sensex past several "Ks" during the last financial year, making money must have been rather easy.

With stocks of almost all shapes and sizes right from consumer, infrastructure and engineering riding the wave, fund managers could have just dozed off doing nothing and yet made mega bucks.

The fund managers' report card for the past fiscal does look impeccable. Out of a total of 261 pure equity funds, nine equity schemes earned more than 100 per cent returns; about 96 beat the widely accepted benchmark Sensex which itself gained a phenomenal 73 per cent; 175 gave returns in excess of 50 per cent; and none, just none, slipped into red.

With 36 per cent of fund managers beating the benchmarks, not all the gains can be attributed to buoyant markets though. "We have been facing a situation where the market breadth is increasing and people are looking beyond a particular sector for out-performance," says Chetan Sehgal, fund manager at Franklin Templeton Mutual Fund.

"It was difficult to choose the sectors as almost all sectors have been a part of the rally. Except for capital goods there is no other sector that has outperformed significantly," says Viraj Ghatlia, head of financial planning, IL&FS Investsmart.

Cent per cent true. A look at the top ranking equity funds over the past one year should demonstrate this point better. The top ranking funds constitute a variety of schemes ranging from sectoral funds to diversified funds, from large-caps to mid-caps and even funds that usually promise to tread the path the stocks markets have abandoned.

The top-ranking fund, for instance, was Prudential ICICI [Get Quote] FMCG Fund, which delivered 118 per cent return. Another sectoral fund Reliance Power delivered 110 per cent during the period with a 65 per cent allocation to power related stocks.

Apart from the three diversified equity funds from SBI [Get Quote] Mutual, which have held on to their top slot through this bull run, Kotak Opportunities (thematic fund that takes concentrated bet in few sectors), Sundaram Leadership (invests in leaders in various businesses) were some thematic funds which had a spectacular run. Besides, mid-cap oriented funds from Sundaram and Prudential were the other two in the toppers' list.

In short, whatever the mandate of the fund, there was enough opportunity in the market to beat the averages provided you chose the right stocks.

The toppers were generally overweight on sectors such as capital goods, construction and sugar to name a few.

They steered clear of or cut exposure to pharma and technology. While big names like Hindustan Lever [Get Quote], BHEL and Siemens, Bajaj Auto [Get Quote], Maruti [Get Quote] and Tata Motors [Get Quote], Reliance Industries [Get Quote] helped beat the Street, some smaller companies like Kalpataru Power, Havells India and Alps Industries [Get Quote], and even metal stock Hindustan Zinc [Get Quote] worked as kickers to the winning portfolios.

For instance Kalpataru Power, where Prudential ICICI Emerging Star allocated 3.32 per cent of its assets and Sundaram Select Mid-cap placed 4.09 per cent of its assets, gained a whopping 302 per cent in the past one year.

Deccan Holdings, another winner picked by Prudential ICICI Emerging Star Fund, gained 203 per cent during the year. The fund had invested 5.22 per cent of its assets in the stock.

Where winners kept the faith...

Considering that capital goods has had a spectacular run over the past couple of years, most funds managers have been consistently overweight on the sector.

Last year, the BSE Capital Goods Index was the best performing index delivering 155 per cent returns. With returns bettering every quarter - in Q1, the index posted a return of 16 per cent and in Q4, it nearly doubled that much at 34 per cent - fund-men allocated most of their assets to this sector. Capital goods accounted for about 10.50 per cent of the total allocation in Q4 (See Top Sector Holdings).

Scheme Name (all equity schemes)

1 Year

Prudential ICICI FMCG - Growth118.49
SBI Magnum Multiplier Plus 93 - Growth111.50
Reliance Diversified Power Fund - Growth110.18
Prudential ICICI Emerging STAR Fund - Growth109.48
SBI Magnum Tax Gain Scheme 93103.67
SBI Magnum Global Fund 94 - Growth103.23
Kotak Opportunities Fund - Growth102.84
SBI Magnum Sector Umbrella - Contra - Growth101.88
Sundaram India Leadership Fund - Growth101.64
Sundaram Select Midcap - Growth99.45
Returns in %

The average holding of the top 10 schemes over the last four quarters in this sector was around 15-16 per cent.

For instance, SBI Magnum Multiplier Plus had an allocation of over 8 per cent each in Crompton Greaves [Get Quote] and Thermax, which delivered 138 per cent and 151 per cent returns respectively in the past year. Taking together all equity diversified funds, the allocation to the sector has gone up from 6.10 per cent to 10.20 per cent.

Housing and construction sectors have been the most under-researched sectors according to A K Sridhar, chief investment officer, UTI Mutual Fund. Still, the top 10 performing funds hiked their exposure to the construction sectors from 4.23 to 5.09 per cent over the past year.

"We stayed invested in housing and construction segment because of the sheer volume of construction activities happening in the country," says Sanjay Sinha, fund manager, SBI Mutual fund.

SBI Magnum Global Fund 94, again a top performing fund, has increased its allocation to the housing and construction sector from 4.94 per cent to 10.44 per cent over the last four quarters. One stock that the fund has bought into is Ansal Properties, which accounted for 4.58 per cent of net assets in March 2006. Some other construction bets include Nagarjuna Construction (3.07 per cent) and IVRCL Infrastructure (3.37 per cent) both of which were stunning performers last year.

SBI Magnum Multiplier Plus 93, another front-runner, has however maintained an average allocation of around five per cent through all four quarters. On an average top 10 schemes held around 4-5 per cent of assets in Housing and construction over the financial year. While all diversified equity schemes almost doubled their allocation to this sector from 1.03 per cent to 2.04 per cent in the four quarters.

Another sector where winning funds hiked exposure was auto and auto ancilliaries. Last year, the BSE Auto index gave 110 per cent return, second best after capital goods. The allocations to this segment went up from 4.84 per cent in Q1 from 6.37 per cent in Q4 for all diversified equity funds.

"We still fancy two wheelers a lot and are positive on stocks like Hero Honda and Maruti," says Sri Vidhya, fund manager, Sundaram Leadership fund, which managed to deliver 101 per cent return.

Last year though FMCG stocks were truly fast moving with the BSE FMCG index gaining 109 per cent. Even the consumer durables did well with the BSE Consumer Durable index posted a return of 115 per cent on the back of outstanding performance by watch and jewellery market Titan Industries [Get Quote] and Videocon [Get Quote].

Prudential ICICI FMCG, the topper last year, however, played it safe by maintaining an average exposure of 15 per cent in textiles and consumer durables over the past year.

The fund did well taking exposure to lesser known companies like Alps Industries which returned 95 per cent and emerging consumer major Dabur [Get Quote] (124 per cent) where the fund had placed 6.59 per cent of its net assets.

For Sundaram India Leadership Fund, the favourite was sugar. The fund almost doubled its allocation to around 6 per cent from 3 per cent in March 2005. "We are holding sugar since the inception of the fund. The fact that crude oil prices have risen sharply, and the demand for ethanol has gone up, has pushed up sugar prices," says Sundaram's Sri Vidhya.

...where they wavered

The BSE Metal was the worst performing index over the last four quarters, giving negative returns in three of the last four quarters and just about 40 per cent over the past year. Ironically, the top 10 performing funds constantly raised their stakes in metal stocks (including steel) from 2.6 per cent to 4.37 per cent over the last four quarters.

Defending the move, says Nilesh Shah, CIO, Prudential ICICI Mutual Fund, "We are looking for companies which produce value-added products, since they can escape the vagaries of price movements."

Notably, true to its label, SBI Contra Fund, which primarily seeks to beat the market by betting against the market, has about 10 per cent allocation to metals including steel. Its top holding at the end of March 2006 was Hindustan Zinc constituting 5.78 per cent of net assets. Last year, the stock zoomed 195 per cent and the party continues on the bourses.

Over the last quarter, Prudential ICICI Emerging Star Fund, the fourth top performing fund also increased its metal exposure to around 5.7 per cent from 1.8 per cent over the last four quarters. On an average the top 10 schemes held around 4-5 per cent of assets in metal stocks. The holding of all diversified equity schemes in this sector is up from 3.26 per cent to 4.47 per cent.

Textiles stocks have however been treaded with cautious optimism by fund managers with allocations by top 10 funds averaging around 3 per cent.

Prudential ICICI FMCG fund had been more bullish than others with weightage around 6-7 per cent for the sector. That is also partly because of the nature of businesses the fund is supposed to invest in. SBI Magnum Multiplier Plus 93 also had a weightage of 5-6 per cent to textiles during the period.

...and what they skipped

Similarly, another laggard was pharma stocks. Over the last 12 months, the BSE Healthcare lagged behind the Sensex posting a return of 51 per cent returns. Predictably, those that did well did so by being underweight on the sector.

The top 10 funds pruned their exposure to pharmaceuticals from 6.07 per cent to 4.37 per cent over the last four quarters. Sankaran Naren, fund manager, Prudential ICICI AMC. "We are bullish on select pharma stocks with focus on exports," he adds.

In a market that has been sizzling on the glory of a resurging domestic economy, the export-oriented technology sector seem to have been relegated to the background. One fund manager regrets having bough mid-cap IT stocks over the last year, which have been laggards. The average allocation to the sector by all diversified equity schemes is up from 6.8 per cent to 7.93 per cent during the past year.

With greater earnings visibility in the sector, especially after the fourth quarter results and bullish guidance by the top-tier companies, fund managers are back on a buying spree. "I am bullish on the visibility in top-line growth for the IT sector," says Mihir Vora, fund manager, ABN Amro Mutual.

Another disappointment has been banking stocks, which remained volatile during the year due to uncertainties on interest rates. On an average top 10 schemes held around 3-4 per cent of assets in banks over the past financial year.

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