The Hindu Business Line : SBI Mutual steals the show

IT WAS dominance of a kind rarely seen in the mutual fund industry over the past 15 years. There may have been occasions when a couple of funds from one stable would have run away with the honours. But, then, the universe of equity funds was quite small. Now the picture is different, as equity funds number close to two hundred.

In this competitive environment, SBI Mutual turned in a dazzling show in 2005. Five of its equity funds figured in the top 15 (see Graphic and Table for list of chartbusters and laggards); two new funds from SBI Mutual also made the cut in a listing of funds with a track-record of less than two years, and its balanced fund was bested only by HDFC Prudence. To trail HDFC Prudence by just under a percentage point deserves notice and praise, as the latter has been a top performer for close to a decade now.

HDFC Mutual proved yet again why it should be at the top of an investor's preference list; it may not have delivered the kind of spectacular numbers that SBI Mutual turned in across several funds. It did, however, consolidate the impressive performance over several years with yet another good year that should have enriched and gladdened unit-holders. New equity funds raised Rs 25,000 crore in the year gone by, notching up a record even as the Nifty, Sensex and a host of other indices moved into uncharted territory. Quite a few of the funds launched over the past couple of years have made an impressive beginning, with Prudential ICICI Mutual and SBI Mutual at the forefront.

In a year that was good for equity funds, our preferred list (see Box) remained largely unchanged. Our view that investing in open-end funds with a long-term track record is better than writing out cheques for new fund offers is unaltered, despite the impressive start of a few funds.

Richly rewarded, but...

Investors in SBI Mutual have been richly rewarded by the outstanding performance of several funds in 2005. With the eye-popping returns, SBI Mutual's comeback is complete. It went through a couple of harrowing years after the meltdown of equities in 2000. It also did not end that year's bull market as a star performer. It did appear that it would go into oblivion, like many other bank-sponsored funds.

It has, however, derived the biggest bang for the buck in the bull market since 2003. None exemplifies this better the SBI Magnum Multiplier 1993, an also-ran for several years. It has come back so strongly that it now figures among the top performers. Here are some facets of SBI Mutual's performance that catch the eye:

The extent by which its funds have outpaced the benchmark indices;

The strategy of identifying a small number of ideas that could pay off and backing them completely without sacrificing the requirement of a diversified portfolio;

The ability to pick less fancied stocks ahead of most other investors, ensuring an early entry; stocks such as Sintex, KEC International, Crompton Greaves, Thermax, IVRCL, Shree Cements and Praj Industries are a few examples.

The way in which it has been patient with the chosen stocks to benefit from the several bouts of re-rating in the mid- and small-cap stocks;

A compact portfolio which minimises the number of correct calls in stock selection and timing of buys and sells;

The consistency with which the fund figured among top performers on a quarterly basis over the past couple of years; and

The strategy shift to enhance exposures to large-cap stocks in the second quarter of 2005, which has delivered gains and enabled the fund-house to be prepared for choppy markets.

... a big risk looms

Investors in SBI Mutual have, however, had to cope with a significant change. Mr Sandip Sabharwal, who was Head of Equity and widely regarded as the brain behind the performance of the fund-house, quit and moved to a private equity outfit.

He has been replaced Mr Sanjay Sinha from UTI Mutual while Mr N. Sethuram remains the Chief Investment Officer. How the fund handles this significant change will have to be tracked closely.

If it consolidates on the gains of the past three years and rides any corrective phases without much damage, that will be good tidings for investors.

The Sabharwal effect

We have been positive on SBI Mutual's performance over the past couple of years. Does the departure of Mr Sandip Sabharwal change that? Yes. We suggest that investors could complete the current systematic investment plan and track the fund-house's performance over the next six-to-twelve months before committing more funds.

Over such a period, we believe investors will get a fix on the fund's strategy and its ability to pick stocks that could deliver superior returns. There is, however, no need, at this juncture, to cut exposures.

The departure of Mr Sabharwal should also highlight a key risk that investors in mutual funds, especially now in HDFC Mutual and Franklin Templeton Investments, have to focus on. Mr Prashant Jain and Mr K. N. Siva Subramanian have been at the forefront of management in these two fund-houses respectively for more than a decade and have a sterling track record. They manage in excess of Rs 5,000 crore each, accounting for a sixth of the assets of equity funds as a class.

In Franklin Templeton, the equity funds not managed by Mr Siva Subramanian have had an indifferent track record over the past couple of years. Though not in the same league, Mr Dhawal Mehta of HDFC Mutual has started to notch up an impressive record.

We are not suggesting that these two fund-houses could go through a change similar to what SBI Mutual has had to endure. Though the risk may not materialise, investors should not ignore it completely.

Different styles work

Actively managed funds have yet again proved that they are a superior option to index funds in a market such as India. Here are a few notable aspects of the mutual fund show in 2005:

Most of the top performers have benefited immensely from the bullish phase in mid-cap stocks. Pantaloon Retail, Crompton Greaves, Sintex, Aban Loyd, KEC International, Kirloskar Brothers, Amtek Auto, Jaiprakash Associates, Bajaj Hindusthan and Subex Systems, to name a few, are mid-cap stocks that powered big-ticket gains.

In the large-cap space, two funds that delivered a top-notch performance are HDFC Equity and HDFC Top 2000, with higher returns than those of several equity funds with a pronounced mid-cap tilt.

These two funds, too, have a dash of mid-cap exposures; for instance, in HDFC Equity, mid-cap stocks accounted for a tad more than 10 per cent of assets.

Funds with an asset base of Rs 300-500-crore have delivered superior returns.

Courtesy the greater depth in the market, with close to a hundred large-cap stocks and an expanding universe of quality mid- and small-cap stocks, even funds with assets of over Rs 1,000 crore have recorded a fairly good show.

In the mid-cap space, the outstanding story is Franklin Prima; despite an asset base of about Rs 2,000 crore, this fund has found a way to maintain its impressive track record.

Sundaram Select Midcap has an aggressive style linked to market momentum and it has consistently done well over the past three years.

Funds with a compact portfolio (like Magnum Contra, Magnum Global, HDFC Equity and HDFC TaxSaver) as well as those that prefer a long list of stocks (Reliance Growth, Sundaram Select Midcap, PruICICI Dynamic Plan and Franklin Prima) have provided attractive returns.

The depth in the market in terms of stocks and sectors now provides scope for several investment styles to flourish. This augurs well for investors.

Preferred choices

IN mutual funds, investors have more choice than at any time in the past. There are several new funds that have made an impression. We will, however, suggest that investors stay with funds that have exhibited their ability to perform well in different phases of the market.

For fresh investments, use the systematic investment plan, as it will enable investors to capitalise on any weakness in the broad market. Our preferred picks: HDFC Equity, HDFC Top 200, HDFC TaxSaver, Magnum TaxGain, Franklin Prima, Reliance Growth, HDFC Long Term Advantage, DSP ML Opportunities, Franklin Bluechip and Prudential ICICI Tax Plan.

In the balanced funds category, HDFC Prudence remains our top choice. We also like Magnum Contra (which has been one of our top ten picks over the past year), Magnum Global, Magnum Balanced and Magnum Multiplier Plus; but investors could temper exposures once the present systematic investment plan runs its course and take a call once there is clear evidence of how the funds fare under the new management. There are four tax-saving funds in the list. An investment will entail a three-year lock in period. We will advocate these funds even for investors who have no tax-saving requirement.

An impressive track record, a small asset base and a three-year lock in period that ensures stability in funds under management are factors that could enable these funds to turn in superior returns as compared to the benchmark indices as well as peers.

Our dark horse picks are: PruICICI Discovery, PruICICI Emerging S.T.A.R, Magnum Emerging Businesses, Reliance Diversified Power and Kotak MNC.

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