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Shanthi Venkataraman

THE first quarter of 2005 saw the market scale new highs and investors taking to equity mutual funds with renewed vigour. But the euphoria did not last too long, with the indices tumbling as rapidly as they rose, much to the chagrin of equity investors. Mutual fund investors could only hope that their funds would keep pace with the choppy market. And they did.

Fund managers turned out to be savvy investors, with a majority of the funds faring better than the market. About 60 per cent of the 175 equity funds evaluated by Business Line declined less than the Sensex; and 70 per cent beat the Nifty. With the benchmark indices shedding 3-4 per cent over the period, however, quite a few funds turned in negative returns.

The striking feature of the quarter's performance, however, was the divergence in returns across funds. Top-performing equity funds brought in 6-15 per cent — no mean achievement in the volatile market of January-March.

On an average, however, the value of funds fell about 1.5 per cent. Diversified funds that figured in the bottom quartile of the mutual fund rankings not only trailed the benchmark indices, but with negative returns of 5-10 per cent, their performance was also much worse than that of the leading funds.

A look at the funds' performance this quarter reveals few surprises. As is often the case when evaluating performances over such a short time-frame, funds known to consistently outperform the market did not figure in the top of the rankings. Instead, quite a few funds with inconsistent track records raced ahead, aided by focussed exposures to sector themes that enjoyed fancy.

With the market going topsy-turvy, the risk-averse would have found balanced funds a safer option. With their limited exposure to stocks, these funds were better placed to preserve capital than equity. The returns of the top-performing funds in this category were, however, comparatively modest.

Funds that raced ahead

But do not let the relatively poor performance of your fund prompt you to switch to one of those funds at the top of the performance chart. While the top ten funds delivered strong returns, they are not necessarily the ones with the best track record over a longer time-frame. Funds such as Taurus Star Share and GIC Growth Plus II, for instance, had an uninspiring five-year record.

For SBI Mutual, the quarter proved exceptional, with four of its schemes figuring in the top ten. While SBI Magnum Tax Gain and Magnum Contra were among the top performing funds in 2004, Magnum Global has had its ups and downs, figuring among the top performers in some quarters, and lagging behind in others. Magnum Emerging Business Fund was only recently launched.

Quite a few funds launched over the past year figure in the top quartile of fund rankings. UTI Basic Industries, Reliance NRI Equity, ABN Amro Equity, Prudential ICICI Discovery and Principal Dividend Yield all turned in relatively good performances.

In contrast, funds with a superior long-term track record, such as Franklin Bluechip, Templeton Growth and Alliance Basic Industries, trailed the indices this quarter.

Riding on sector themes

While the performance of new funds needs to be evaluated over a longer term before fresh exposures can be considered, the good showing of theme-based funds, such as Magnum Emerging Business and UTI Basic, does highlight the benefits of a focused approach to investing in dominant sector themes. While the former focuses on companies with an export orientation, UTI Basic zeroes in on sectors such as engineering, construction, power and metals.

Engineering and construction sectors have been in the limelight; stocks from these sectors have formed a major part of the portfolios of the top performers. Funds such as Magnum Taxgain and Magnum Contra have a large exposure to engineering and construction sectors, while metals form the largest holding of UTI Basic.

A few missed opportunities

A sector that has made a comeback, but does not figure in the top sector holdings of any of the major funds, is consumer products. Sector funds such as PruICICI FMCG and Franklin FMCG are among the high-fliers. But most diversified funds appear to have missed the opportunity in this segment.

Strangely, the banking sector is conspicuously missing from the best holdings of the good performers, save Magnum Contra, despite the re-rating that this sector has enjoyed. The BSE Bankex has advanced by about 2.5 per cent even as other sector indices declined over this period.

While sectors such as construction and banking continue to be in favour, investor appetite for pharmaceutical and oil stocks waned over the past quarter. This is underscored by the decline in the BSE Healthcare and BSE Oil and Gas Indices; the former dipped by about 17 per cent and the latter by five per cent over the period.

Funds focussed on the pharmaceutical and oil sectors piled up at the bottom of the performer's list. Franklin Pharma, JM Healthcare, JM Basic and UTI Petro had as much as 8 to 15 per cent shaved off from their NAVs.

Diversified funds such as GIC Growth Plus II and Magnum Emerging Business Fund, however, were better placed to deliver superior returns despite their significant exposures to the pharmaceutical sector.

Mid-caps outperform

Even as large-cap stocks lost ground steadily, the mid-caps gained. Usually, mid-cap stocks tend to shed more value during a market correction. This quarter, however, proved an exception. The CNX Midcap 200 gained about 5 per cent between January and March, against the decline of 3-4 per cent in the Sensex and Nifty.

More mid-cap funds recently joined the race — UTI Midcap, Chola Mid-cap and PruICICI Emerging STAR Fund were launched over the past year. While Chola Midcap emerged as the top performing mid-cap fund this quarter, PruICICI Emerging STAR lagged.

Chola Midcap, Birla Midcap and Sundaram Midcap were the only ones that were able to keep pace with the CNX Midcap 200.

Stock picks such as Siemens, LIC Housing Finance, Birla Corporation and Geometric Software paid off for Birla Midcap. Chola Midcap, too, had its share of offbeat stocks such as Jain Irrigation and Infotech Enterprises. Sundaram Midcap's performance was helped by its exposure to sugar and construction stocks.

While these funds are relatively recent entrants, Franklin Prima, which has been a consistent outperformer over the years, turned in only a modest performance. Its largest sector exposure was auto and stocks in this space did not fare well.

Balanced funds, preserving capital

With the equity market volatile and the debt segment offering only modest returns, the returns registered by the top-performing balanced funds this quarter, at 4-5 per cent, may not be as attractive as that of equity funds. But balanced funds have, on an average, contained the declines better than equity funds, given the limited exposure to equity.

Funds that raced ahead in this category, such as Tata Balanced Fund and SBI Magnum Balanced Fund, have allocated about 70 per cent to equity and about 20-25 per cent to debt. These funds have invested in a blend of mid-cap and large-cap stocks. Stocks such as Crompton Greaves, Siemens, Coromandel Fertilisers and Deepak Fertilizers, which delivered good returns over the quarter, helped the performance of these funds.

Asset allocation funds with a tilt towards debt also did better than their more aggressive counterparts. For instance, FT India Life Stage Fund of Funds-50s plus plan, with its 20 per cent allocation to equity, turned in 1.3 per cent, while its 20s-plus plan, which allocates 80 per cent of its assets to equity, lost 4 per cent of its NAV.

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