This fund ran into problems from day one. Not because of an inherent flaw but mainly because of investor perception.
Backed by the returns from Reliance Vision and Reliance Growth, investors' expectations from this fund were phenomenal. Reliance Equity Opportunities, launched a year before this fund, was also enjoying the spoils of the bull run. No one stopped to think about how different this fund was. Reliance Equity was launched in March 2006, at the peak of the bull run. So it should have been obvious that it would not be able to match the returns of its predecessors. Added to that was the fact that it is not a regular diversified equity fund. Its mandate is to invest in the top 100 companies by market cap. And, it has what the fund calls a “risk-aversion feature”, which means that a portion of this fund's portfolio will always be hedged.
Of course, its ad campaign (Make the most of this bull run) did not help investor perception. So investors flocked to this fund during its NFO and then began to systematically exit. From Rs 5,987.97 crore in April 2006, it dropped to 3,493.68 crore in July 2007.
These outflows will hit those who stay invested because the initial issue expenses will be levied on them. On the NFO amount of Rs 5,752 crore it would amount to Rs 234 crore (the fund has apparently charged only 4.066 per cent against the maximum 6 per cent). But as the fund size drops, the effective percentage increases.
Since the fund uses derivatives to hedge a part of the portfolio, returns will be slightly compromised but downside risk will be minimised. So investors can expect protection when the market falls, but not fabulous returns when on the rise.
The hedging mechanism also necessitates a higher than average cash holding. This year, it has averaged at around 15 per cent though last year there were periods when it was as high as 30 per cent.
Though the fund is a risk-averse proposition, it has now turned slightly more aggressive. As is evident from its top five holdings (10.94% - March 2006 to 33.45% - July 2007), it has been taking larger bets and the large-cap allocation has been decreased from 94.89 per cent (April 2006) to 63.9 per cent (July 2007) giving more way to mid-caps. Though the fund has been in existence for just 17 months, it has had a stable portfolio. The fund only declares stocks that account for over 1 per cent of the assets. The number of stocks is fairly constant at around 20. Eight stocks in the July portfolio have been there since inception. Another eight have been there for 13 months or more, though in three (Jaiprakash Associates, Tata Motors, Hindustan Unilever), there has been some exit and re-entry.
Going by the returns, it has delivered what it has set out to do - deliver conservative returns when markets rally and lesser falls when markets drop. It has a good fund manager, Sunil Singhania, at the helm. But, don't expect magic.
This article was originally published on October 11, 2007.
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