The Hindu Business Line : Diverging sharply

Diversified equity funds are beginning to show their scars from the vicious market swings of 2008. The one-year return for the diversified equity category is now in negative territory, and stands at a minus 8.2 per cent. This roller-coaster market has also opened up a yawning gap between the best and worst performing equity funds.

While the best ones for a year — DWS Investment Opportunity, DWS Alpha Equity and Reliance Regular Savings — sport a gain of 10-19 per cent on a one-year basis, the laggards — Birla Sun Life Opportunities, DBS Chola Contra and CanRobeco Emerging Equities — lost 20-24 per cent of their NAVs over the year.

Among the diversified funds, funds that held high weights in defensive sectors such as pharma and software and cut back on sectors such as banks and capital goods, weathered recent declines well. So did funds that focus on “value” stocks such as Templeton India Growth Fund or Tata Equity PE Fund.

Surprisingly, there was big divergence within theme funds as well. Mid-cap and small-cap funds have for instance, diverged widely in how they handled the fall. While Kotak Mid-cap, Franklin India Prima, Principal Junior Cap have lost between 21 and 25 per cent in value, those such as HSBC Midcap and Magnum Midcap have managed to contain their declines to 17-18 per cent.

So, should an investor looking to add to his equity portfolio buy the funds with the best one-year return? Probably not. Funds and themes that worked well so far in 2008 won’t necessarily deliver in a sustained bull market. “Defensive” sectors such as pharma or FMCG, in which some of 2008’s performers were overweight, may not deliver strong returns in a sustained market recovery.

If and when Indian stocks do make a strong recovery, it will be because of an improving economic and earnings outlook for Indian companies. In that case, the rally may be led by sectors such as infrastructure, financial services and capital goods, which were drubbed in the recent reversal.

Therefore, we advocate buying equity funds that have navigated not only the volatile markets of 2008, but also the preceding bull years as well — HSBC Equity, DSPML Top 100 Equity, HDFC Top 200 and Sundaram BNP Select Focus fit the bill well. Templeton India Equity Income and DSPML World Gold Fund remain good diversifiers for the portfolio.

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