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Wild Mood Swings

When the going’s good, JM Hi Fi does well. But when tough times come, it does really badly

JM HI FI is a typical momentum offering that tends to dramatically outperform or underperform. When it does do well, it bolsters investors' confidence. But when it slumps, it probably gives them sleepless nights. Take a look at these figures to get the point. In the March 2007 quarter, the category fell by an average of 6 per cent while the Nifty, by 3.65 per cent. JM HI FI fell by 18.50 per cent! But when the category gained 14 per cent in the September 2007 quarter, and the Nifty 16.28 per cent, this fund stomped ahead with a gain of almost 26 per cent.

Fund manager Sandeep Neema maintains an extremely focussed portfolio that has averaged at just 24 stocks in the past one year. Moreover, the portfolio is dominated by mid- and small-cap stocks. The fund's narrow mandate is basically limited to housing, infrastructure and financial services (the name itself implies that). He tends to sport a hefty construction stake (which has gone as high as 51.42 per cent) and, at times, remains fully invested in equity. When all these factors are viewed in totality, it's obvious that the fund courts a significant liquidity and valuation risk.

Neema looks for companies that enjoy robust earnings-growth but claims that he won't pay a high price for that growth. To his credit, he has succeeded. Hindustan Construction, IVRCL Infrastructure & Projects, Unitech, Peninsula Land, Orbit Corporation, Kalindee Rail Nirman Engineers, Emco, BHEL, IDBI, IDFC and Bharat Bijlee are some of the companies in which he made a well timed entry and, in some cases, an exit too. But where he did miss the boat to some extent was the rally in the metals sector last year. The BSE Metal index delivered great returns in the last three quarters of 2007 while this fund saw its allocation slip from 28.38 per cent (February 2007) to 10.61 per cent (August 2007).

While Neema does not adhere to a buy-and-hold strategy, neither does he jump in and out of stocks. He exits the moment he has achieved his price objective. As a result, a number of stocks make an appearance for just a few months.

The fund's recent performance must definitely be trying investors' patience. It's year-to-date return (as on March 31, 2008), was -41.21 per cent against a category average of -28.29 per cent. While such a ride could strike fear into the hearts of the most determined investors, it is not a sign that the fund has run out of gas. In fact, it comes with the territory. When infrastructure and real estate stocks did well last year, the fund beat the category average in the last three quarters of 2007. But with the financial services and real estate sectors being out of favour now, the fund has considerably fallen.

By and large, the fund remains inappropriate for most investors. If you can handle a rocky ride and are bullish about these sectors, go for it. But do ensure that it is a small part of your overall diversified portfolio.