The Hindu Business Line : Magnum Emerging Businesses: Hold

Aggressive exposures to mid-cap stocks and concentrated exposures to sectors and stocks were drivers of a strong performance from Magnum Emerging Businesses in the first year following its launch in September 2004. The same factors, however, hurt performance in the mid-cap meltdown that began in late 2005 and in the overall market meltdown of 2006. Investors in the new fund offer would still have earned a 50 per cent return on their investment; the Sensex has, however, appreciated 120 per cent since launch.

While investors may be disappointed with the 9 per cent return over the past year, the returns are not much below the equity fund category average of 11 per cent.

In fact, given its mid-cap focus, Magnum Emerging Businesses has fared better over the past year than most other mid-cap funds such as HSBC Midcap, Kotak Midcap and Franklin Prima.

Most of the out-performance happened in the last six months, during which period the fund appears to have restructured its portfolio.

It has toned down its aggressive exposure to select sectors and small-cap stocks. Some of the positions it added after the market correction in May-June appears to have paid off.

Suitability: The fund however, remains an option only for extremely aggressive investors, especially in the current market phase. Magnum Emerging Businesses aims at investing in stocks that have an export orientation or outsourcing theme and, as its name implies, in nascent businesses.

The theme by itself is suited for investors with a higher risk profile, with its bias towards mid-cap stocks (market capitalisation less than Rs 5,000 crore). The theme would tend to be beaten down in volatile conditions when investors migrate to mature businesses as safe havens.

Second, the fund manager will have to choose from a narrower universe of stocks than that of a diversified fund. So the portfolio is likely to remain concentrated in certain stocks and sectors.

For investors who wish to tread more cautiously at this juncture and who still desire a mid-cap bias, we recommend a switch to Magnum Global Fund, which has delivered a superior return over the past year, as well as the long term, on a risk-adjusted basis.

Portfolio overview: Magnum Emerging Businesses, with its asset base of about Rs 300 crore, has a compact portfolio of 35 stocks. The fund takes measured exposures to stocks, the top five accounting for about 30 per cent of the assets. The top three sectors — manufacturing, textiles and services — make up 40 per cent of the portfolio.

Manufacturing alone accounted for nearly 30 per cent of the assets last May, though it has since been pared to 16 per cent. The metals sector has been added to the portfolio in recent months.

While the sector allocation does not suggest a strong emerging businesses theme, stocks such as Adlabs Films, Bharati Shipyard, Carborundum, Blue Dart Express and Hotel Leela are prominent holdings that capture the theme.

About a third of the assets are invested in stocks with a market capitalisation of less than Rs 1,000 crore, against nearly 60 per cent in May 2005.

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