The Hindu Business Line : JP Morgan India Alpha Fund

What’s on offer: An interval fund that seeks to generate a reasonable level of absolute returns, irrespsctive of stock market direction. The fund plans to do this through a strategy of making short-term ‘paired’ trades.

The fund plans to combine a long (buy) position on a stock or its future, with a short (sell) position on another stock or its future. The paired trades may be initiated on the basis of macro trends or relative valuations between stocks. Example: Expectations of rising oil prices may prompt a long position on Cairn India (a producer) and a short on Jet Airways (a consumer).

The trade will pay off as long as Cairn India outperforms Jet Airways; it will yield negative returns if both stocks move in the opposite direction to what is expected. As the portfolio is trading oriented, loss-making positions will be quickly reversed and replaced, containing downside.

Investment proposition: With the fund’s portfolio positioned on both sides of the market (buy and sell), it expects to deliver returns no matter how the overall stock market performs. While the performance of traditional equity funds depends on the number of successful ‘buy’ opportunities that they unearth, this fund will benefit both from successful “buy” and “sell” calls. This strategy may be well suited to present market conditions, where stocks are expected to be range-bound for a while, with the economic slowdown and earnings concerns surrounding several sectors.

Suitability: A paired strategy has the potential to deliver high returns. But this fund is benchmarked against the Crisil Liquid Fund index, suggesting that investors should conservatively set their return expectations in the 8-12 per cent range. While paired trades may make the fund ‘market-neutral’ in the short term, the trading-oriented mandate may also prevent it from effectively cashing in on any secular rally in stocks. Pros and cons: The fund helps you avoid a directional call on the markets, but all the risks associated with active investing apply to it. A wrong base assumption for the paired trade can lead to negative returns. Hence, the fund manager’s ability to get his calls on relative valuations or macro factors right will be crucial to how this fund performs. This fund may place even greater reliance on the fund managers’ skills than would be the case with a long-only fund.

In a secular bull market, even stocks that under-perform their peers or the markets tend to deliver a reasonable level of absolute return. Two, given the trading oriented portfolio, the fund manager will have to make many more calls than would be the case with the ‘buy-and-hold’ fund. In the absence of a sufficient number of attractive paired trades, the fund may carry a high cash component. Finally, this fund is targeted at informed investors, many of whom may be able to make trading calls in the markets on their own. In fact, an individual investor may have to unearth just one or two paired trades to generate good trading gains. But this fund will have to unearth a large number of such trades simultaneously, to remain diversified and to deploy its entire assets.

What to do: Equity funds currently available in the Indian market are all ‘long-only’ funds, dependent on a steadily rising stock market to deliver returns. In this respect, JP Morgan India Alpha Fund is a unique product, allowing investors to benefit both from a scenario of rising and declining stock prices. However, the fund places great reliance on the management skills of the fund house.

Given the relatively short track record that is available for JP Morgan as a retail asset manager in the Indian context and the fact that this strategy in untested in the mutual fund space, waiting for the fund to notch up a return track record before considering investments may be a good course to follow.

Offer details: The fund opened for subscription on July 31 and closes on August 29. The minimum application size is Rs 5,000. The fund will be managed by four managers — Harshad Patwardhan and Amit Gadgil (for the equity portion) and Nandkumar Surti and Namdev Chougule (debt portion).

More Stories on : New Fund Offer | Mutual Funds

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page