If funds that you bought during the 2007-08 market highs are draining your money, here's how you can plug the leak.

The stock markets have soared. But your equity fund portfolio has refused to join the party. How has this come about?

It may be due to timing. The lion’s share of investments made in equity funds in recent times was through the New Fund Offers (NFOs) floated in 2007. The year’s inflows of over Rs 14,500 crore accounted for a fifth of all money collected by equity funds in the last ten years.

At the time, not only was the market at a high, but also stocks from infrastructure, commodities and other fancied themes traded at astronomical valuations.

So, what should investors in these funds do? Get out of a bad bargain? Or soldier on, awaiting better returns? We decided to take stock of funds which were launched at the previous market peak and provide you our assessment.

If there’s one common thread uniting schemes launched at the previous market peak, it is that they’ve delivered lacklustre performance. Of the 18 funds launched between September 2007 and January 2008, over 10 lagged their benchmark. The Net Asset Value (NAV) of half the schemes continues to languish much below the issue price of Rs 10. Infrastructure-themed funds launched during the last leg of the infra boom lead the list of losers, with a significant erosion in NAV in the last five years.

Even as stocks from sectors such as auto, IT and banking have witnessed a healthy recovery since 2009, there has been no respite for infra stocks.

The infrastructure story has come unstuck with many projects stalled due to over-optimistic projections, glitches in fuel availability and skirmishes with the Government on tariff-related matters or land acquisition issues. Despite the frantic efforts by the Government recently to speed up clearance for infrastructure projects, securing approvals can be a long-drawn process. With many players saddled with cash flow problems, availability of cheap funds and new order wins will be critical for a re-rating of the sector.

All these suggest that funds launched at the peak of the infra cycle may not recoup lost ground anytime soon. With NAVs of most of these funds at Rs 4-9, they will have to double from here for the NFO investors to make a respectable double-digit return.

Five funds to exit

So, what can an investor do about these funds? It may be best to cash out on thematic funds that score very low on consistency. Even if select stocks from the infrastructure space do zoom on the back of political changes or reforms, you can make the most of it by opting for diversified funds that invest in these stocks.

JM Core 11 Fund’s mandate to invest in not more than eleven core sector stocks worked actively against it, as infra and energy stocks tumbled. With a highly concentrated portfolio, the fund was at the bottom of the pile in the last five years. Had you invested Rs 10,000, the current value of the investment would be about Rs 3,640.

Though the fund managed to stay ahead of the Sensex during the March 2009-November 2010 rally, it has had a patchy record since. It has outpaced its benchmark only a fifth of the time in the last five years. Even as the Sensex clocked 5 per cent gain in the last year, the fund slumped almost 8 per cent. This is despite a large-cap bias.

Following L&T group’s acquisition of DBS Chola’s MF business in 2009, DBS Chola Infrastructure Fund was re-christened L&T Infrastructure Fund. Being no exception to the trend, the fund’s NAV has tanked 40 per cent since inception. Its rolling annual return has been lower than its benchmark 96 per cent of the time in the last five years. During the November 2010-December 2011 correction, the fund lost over 38 per cent, 10 percentage points more than its benchmark. Exposure to stocks such as BEML, Jaiprakash Associates, Reliance Industries and Kesoram Industries weighed on the fund’s performance.

An investment of Rs 10,000 in the fund during the NFO is now worth Rs 6,000

Despite trading at bargain-basement valuations, energy stocks constitute yet another theme that didn’t make for a promising thematic investment. Sundaram Energy Opportunities Fund has borne the brunt of this. The fund’s holdings suffered owing to the problems in the oil and gas sector. While it was launched on the premise of a significant ramp-up in India’s gas output, it has been undone by skirmishes about pricing, rising subsidies, under-recoveries and a runaway rupee.

Despite underperforming the benchmark across one-, three- and five years, the fund scores relatively better on consistency. Its one-year return in the last five years has been higher than its benchmark 55 per cent of the time. While increase in gas and diesel prices may alleviate woes for refiners, this may not be enough for these stocks to retrace their 2007-08 highs.

LIC Nomura Infrastructure Fund has not only lagged the BSE 100 Index and peers across one-, three- and five-year time-spans, it also scores low on consistency. The fund’s yearly return has lagged its benchmark 94 per cent of the time in the last five years. Its NAV has slipped by over 20 per cent since its inception in March 2008.

Though the fund has a fairly diversified portfolio with exposure to banks and other infra-related sectors, this did not help returns. Being overweight on banks, such as Andhra Bank, IDBI Bank and Union Bank of India, actually hurt its performance. Likewise, higher allocation to stocks of downstream oil companies HPCL and IOCL, besides GMDC and Voltas also affected the fund’s performance.

Though the Sahara R.E.A.L Fund managed to marginally outperform its benchmark – the Nifty in 2012, it has not been able to sustain its performance. The fund has straggled behind the market three-fourths of the time in the last five years. The fund’s NAV has fallen over 15 per cent since inception.

With the NAVs of all these funds quoting 20-50 per cent below par value, investors can consider switching to consistent, top quartile performers in the large cap space, such as Franklin Bluechip, ICICI Pru Focussed Bluechip Fund, L&T Equity and L&T India Large Cap Fund. Investors with a higher risk appetite can opt for mid-cap funds, such as HDFC Midcap, Religare Invesco Small and Midcap and Sundaram Select Midcap.

Three to hold on to

Even as the performance of most thematic funds disappointed, select large- and mid-cap funds launched at the market peak have held their head above water. Some even scored high on risk-adjusted performance.

Launched at a bad time, the IDFC Sterling Equity Fund has nevertheless succeeded in bettering its benchmark 95 per cent of the time in the last five years. It not only outpaced CNX Midcap during rallies but also managed to curtail losses during bear markets.

The fund reduced allocation to stocks, such as Shree Renuka Sugars, Syndicate Bank and Union Bank during the November 2010-December 2011 fall. This helped it contain losses to about 28 per cent, even as CNX Midcap lost nearly 37 per cent during this period.

Religare Invesco Equity, a go-anywhere fund formerly owned by Lotus Mutual Fund, has earned 8 per cent return annually since it flagged off in October 2007. Acquired by Religare Mutual Fund in November 2008, the fund has managed to consistently beat its benchmark — the BSE 100 Index.

It clocked gains ahead of its benchmark three-fourths of the time in the last five years. Even as volatility in mid- and small-cap stocks has shot up since 2008, Religare Invesco Equity has fared well across market cycles and time periods.

Though the NAV of JP Morgan India Smaller Companies hovers closer to its issue price, its performance has improved significantly in the last five years. The fund has gained over 23 per cent annually over the last five years, higher than the 17 per cent annual increase in the CNX Midcap Index. In addition to beating the benchmark across one-, three- and five-year timeframes, the fund also managed to sustain better-than-benchmark performance during bull and bear phases. Over a five-year timeframe, the fund has bettered its benchmark 71 per cent of the time.


(This article was published on January 11, 2014)
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