The Hindu Business Line : Mid-caps and size: Winning combo for MFs<br>New funds make an impressive start

IF THERE is one fund-house that dominates the performance chart for the July-September quarter, it is Prudential ICICI Mutual. A host of diversified funds from its stable top the rankings list.

SBI Mutual too has had yet another impressive quarter; ironically, its sector fund focussed on the FMCG space missed out on a fine quarter for this sector, even as PruICICI FMCG Fund topped the rankings chart and consumer stocks enjoyed investor fancy.

SBI Mutual's performance has also catapulted its Head of Equity and fund manager, Mr Sandip Sabharwal, to the limelight. He has, over the past few years, emerged as one of the top three equity fund managers. Funds managed by the other two — Mr Prasanth Jain of HDFC Mutual and Mr K. N. Sivasubramanian of Franklin Templeton — also had a good, albeit not spectacular, quarter; this has been consistently so for almost a decade now.

As with any bullish quarter for equities, about 75 per cent of the equity funds outpaced the benchmark indices. HDFC Mutual may not have set the charts ablaze, as PruICICI Mutual and SBI Mutual did; but it did notch up yet another quarter of superior gains that has kept several of its funds on our short-list of preferred funds for several years now (see Box on `Preferred plays').

In the Franklin Templeton stable, funds such as Prima, Bluechip, Franklin Opportunities and Flexi Cap, managed by Mr Sivasubramanian, continue to figure among the top performers; he has been in charge of Prima and Bluechip for about 12 years now — the longest any fund manager in India has been at the helm of affairs. But there is a noticeable slack in the other funds of Franklin Templeton. That this trend is not confined to this quarter makes it a cause for concern.

Size factor at play

Over the past two-and-half years, there has been a manifold rise in the asset base of funds such as Franklin Prima, Franklin Bluechip, Reliance Growth, HDFC Equity and HSBC Equity. Aided by a bullish undertone in the equity market, most new funds raised several hundred crore rupees as capital; and a few, such as Franklin Flexi Cap, HDFC Premier Multi Cap and Fidelity Equity, crossed the Rs 1,000-crore mark.

The graduation of several mid-cap stocks to large-cap status and an expansion in the mid- and small-cap space have opened up ample investment opportunities for funds with a larger asset base. This year, funds with an asset base of Rs 300-500 crore have delivered returns that are five percentage points higher than the average for the universe of equity funds.

Funds with an asset base of over Rs 1,000 crore and a large-cap tilt (the exception is Prima) have maintained returns at a fairly attractive level. For these funds, the growth in asset base has tapered over the past year, and this has helped in investment management. But only two funds from this space — Prima and Reliance Growth - have consistently figured among the top performers.

Prima has been particularly consistent despite its focus on the mid-cap space and an asset base of more than Rs 1,500 crore for over 18 months now. Several of its core holdings, such as Goodlass Nerolac, Great Eastern Shipping, MICO, IPCA Labs and Indian Rayon, have graduated and are nascent large-cap plays now. It has, however, managed to find investment ideas that have driven performance.

Mr Sivasubramanian, who manages Prima, has also shown his adeptness in managing large-sized funds in other instances, too. Bluechip — despite a couple of insipid quarters by its standards — remains a superior investment option in the large-cap space. Franklin Flexi Cap - the only new fund from this house — is off to a good start and has an asset base of about Rs 2,000 crore.

In HDFC Mutual, Franklin Templeton and SBI Mutual, stability in the management team is becoming increasingly important.

A subtle shift

SBI Mutual has derived the maximum benefit from the several bouts of re-rating that mid-cap stocks have enjoyed over the past two-and-half years. If its equity funds have turned in top-of-the-chart performance, early entry into stocks such as Crompton Greaves, IVRCL, Thermax, Praj Industries, Sintex, Shree Cements, Arvind Mills, KEC International and United Phosphorus, which have paid rich dividend, is the key reason.

Even as the fund retains its exposures in most mid-cap stocks for a long period now, over the past few months there has been a significant shift in strategy. It had stepped up exposures to large-cap stocks with a focus on engineering, cement and banking.

This shift could prove beneficial as the market appears headed for a period of moderate returns. The sector and stock preferences continue to inspire confidence.

SBI Mutual has, however, persisted with its strategy of having a compact portfolio, of 20-25 stocks. As Mr Sabharwal had outlined in an interview to Business Line, the fund has focussed on identifying a few investment ideas and backed them strongly, but without sacrificing diversification.

The strategy of the other top performing fund house of the quarter is a study in contrast. Prudential ICICI Mutual has 50-70 stocks in most of its equity funds and has put up an impressive show. This just shows that there is room for investment styles that differ sharply.

This is also an indication of the depth in the equity market now. These are encouraging pointers for investors with a long-term perspective.

Preference for new funds

A sizeable number of new funds with a track record of less than a year dominate the rankings list. Barring SBI Mutual and HDFC Mutual, most new offers from other fund houses have performed better than existing open-end equity funds in their stable. In the review of the last quarter's performance, the numbers suggested a greater degree of pressure on fund managers to ensure that these new funds had a promising start.

This quarter's list only strengthens that view. As these funds entered the fray when the bull market was under way for over two years, the pressure to deliver value is understandable. The large sum of money these funds mopped up in the new fund offer period also enhances the pressure. For a large number of investors, it is these funds' performance that would determine their view of a particular fund-house. In this backdrop, questions that come to the fore are: Are fund managers paying greater attention to new funds at the expense of existing open-end funds?

Are more attractive trades diverted to these funds? Are bright investment ideas that may be identified executed first in favour of the new funds?

It is difficult to provide precise answers to these questions on the basis of information now available in the public domain.

But the trends in NAV gains suggest that this could indeed be true. If such practices are verified, and persist, it is a cause for concern. That several of the new funds have invested largely in the mid- and small-cap spaces is also another reason for their performance.

The fairly impressive start of several new funds does not, however, alter our view that open-end funds with a track record of three-to-five years are a superior option; these funds have weathered different phases of the market and this makes them safe bets.

Preferred plays

IF the idea is to capitalise on mid- and small-cap stocks, a few funds from SBI Mutual and HDFC Mutual may be the preferable options. These two fund houses have proved adroit in capitalising on opportunities in this space.

As far as Prudential ICICI Mutual is concerned, its track record in managing different phases of market does not yet compare favourably with those of HDFC Mutual and Franklin Templeton.

For investors interested in building a portfolio of diversified funds, our preferred picks will be: HDFC TaxSaver, HDFC Top 200, SBI Magnum Contra, SBI Magnum TaxGain, Franklin Prima, Franklin Bluechip, HDFC Long-Term Advantage, PruICICI Tax Plan, SBI Magnum Multiplier Plus and HDFC Equity. Reliance Growth would have made the cut but for restriction that it has placed on fresh inflows.

Four tax-saving plans are included in the list. An investment in these funds will entail a lock-in period of three years, even if you do not avail the tax benefit. Going by their consistent performance, we believe the returns will be attractive over a three-year period. These funds have a small, stable asset base; this, too, is a positive.

Dark-horse plays: PruICICI Emerging S.T.A.R, Magnum Emerging Businesses, Reliance Banking, Reliance Diversified Power and Kotak MNC.

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