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Too Stretched

This fund has done well in its short life, but will DSPML Taxsaver suffer from an over-diversified portfolio?

Despite the fund manager's explanation, we believe that this fund is unreasonably spread out. No doubt, DSP Merrill Lynch is known for its extremely diversified portfolios, but this one is very bloated with 91 stocks (it was 97 in March). Being a small fund, one should not be surprised that 55 of the stocks have an allocation of less than 1 per cent and an additional 27 stocks, less than 2 per cent. The top 10 holdings corner a modest 28.44 per cent of the portfolio.

While this may be interpreted as a lack of conviction which could hinder performance, one can't really argue with the numbers. While it outperformed the category average in the first two quarters of its existence, its performance in the December quarter (2007) was impressive. The fund's success stemmed from its exposure to surging mid- and small-caps. The size of the fund favoured a mid- and small-cap tilt and the fund manager capitalised on that wave. The BSE Mid Cap delivered almost 32 per cent that quarter and BSE Small Cap 46.69 per cent, against 17.33 per cent of the Sensex.

But it was this very exposure that proved to be the chink in the fund's armour. In the very next quarter, mid- and small-caps were massacred. Naturally, the fund followed suit. It delivered 47.23 per cent in its best quarter (October 8, 2007 - January 7, 2008) and delivered its worst immediately after with -37.14 per cent (January 4, 2008 - April 4, 2008). Subsequently, the fund's large cap exposure rose from 23.27 per cent in December to 44 per cent by April.

What the fund manager seeks for this fund is simple: to go about delivering returns in a consistent manner with no market-cap or sector bias. In some cases, he holds on to his stocks. In others, he exits the moment he has achieved his price objective and will probably re-enter at a later date.

So stocks like Yes Bank, Development Credit Bank and Welspun-Gujarat Stahl Rohren Ltd that made money for him were in his portfolio for 12 months or less. And while he probably did make money in Educomp Solution and BF Utilities, he would have made more money had he stayed on for a few more months. But then you can't really hold it against him since fund management is all about taking a view.

Though the fund was off to a good start with notable quarterly numbers, it is still very young. However, going by the pedigree of the fund house and the manager at the helm, this one could turn out to be a strong contender in the tax-saving category.