Investors may sell the units of IDFC Imperial Equity Fund. The fund figures among the underperformers in the large-cap category on one-and three-year basis. Sector and stock choices that didn’t pan out well, in addition to higher allocation towards short-term debt instruments (call and money market instruments) took a toll on the fund’s one- and three-year returns. The fund has delivered lower than the category average in this period.

Analysis of the fund’s historical asset allocation trend reveals that it has traditionally had a higher allocation towards debt instruments. While this did help the fund contain the downside in falling markets, it weighed on performance in recovery phases. For instance, during the period January 2008 to April 2009, while Nifty lost over 43 per cent, the fund managed to arrest the slide at 33 per cent. But, the fund lost out in the recovery between April 2009 and December 2010. While Nifty rose by an impressive 77 per cent during the period, the fund, with an average cash and debt allocation of around 11 per cent, missed the rally, gaining just 68 per cent.

On a one-year basis, the fund made a gain of 8.3 per cent. Reducing exposure in outperforming sectors such as healthcare, automobiles, and consumer durables impacted the fund’s performance.

Similarly, increasing holdings in high beta metal and oil stocks dragged the performance. The fund also missed the rally in stocks such as Zee Enterprises and Titan Industries by exiting them early. The fund on an average held 4 per cent of its assets in short-term debt instruments and cash, which also led to underperformance.

Over a three-year time frame, the fund just managed compounded annual returns of 2.7 per cent, lower than the 5 per cent average returns for the category. With average cash in excess of 7 per cent, the sector bets did not work well for the fund. The fund’s strategy to reduce exposure in defensive themes such as healthcare and increasing exposure in high beta sectors such as construction projects and metals did not help performance.

The fund currently holds 24 stocks in its portfolio. Banking and Finance stocks account for about a third of the portfolio. Top 10 stocks account for almost 60 per cent of the scheme’s total assets, increasing concentration risks.

(This article was published on March 9, 2013)
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