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Diversified Equity Funds: Not Dead Yet

Every bear phase finds doomsday prophetics, who torture data to pronounce the death of long-term equity investing. The truth prevails, even when the market is at its trough. The case for long-term investing in equities remains bright if not very strong.

It has been a prolonged spell of bear-run for investors in diversified equity funds no surprise here since the Indian markets have been on of the worst performers in Asia so far in 2001. The glittering returns for early 2000 are now history and the Value Research category of equity funds is currently down 30 per cent for the one-year period. Yet, despite the disappointing performance and sharp losses in the near-term, there are a handful of "islands of safety" where long-term returns of equity funds continue to be impressive. With returns in excess of 20 per cent annualised against a negative 1.13 per cent return on Sensex, in the last five years. These funds re-affirm the basic doctrine - equities are meant for the long haul and require commitment. It is important to highlight here that even five years is not a sufficiently large period for equity investing but the sample is constrained for want of funds with a longer track-record.

Long-Range Gains
  The Leaders…..  (Rs)  (%)
  Pioneer ITI Bluechip 18.98 27.6
  Pioneer ITI Prima Plus 12.04 22.2
  Zurich India Equity 9.93 20.7
  Birla Advantage 21.91 19.6
  …and the Laggards
  GIC Fortune '94 4.70 -11.2
  Canglobal 4.99 -10.9
  Canbonus 7.21 -7.2
  JM Equity-G 6.71 -6.3
  Taurus Discovery Stock 3.75 -4.9

    The Leaders
Now, the all-important question - which are the funds that make it to The Value Research checklist? They are Bluechip and Prima Plus from Pioneer ITI, Birla Advantage and Zurich India Equity together with an asset base of Rs 629 crore against the total of Rs 5097 crore managed under open-end equity funds. While there are another eight funds with positive returns with 5-years return ranging between 13.93 and 1.81 per cent. The rest in the sample of 27 funds have actually led to losses on initial investment. So, what sets apart the gainers from losers? First and foremost, the top four funds have stuck to their investment strategy across all market conditions. Two, and perhaps more importantly, the fund managers have stuck to these funds since launch.

For instance, Birla Advantage may have lost 46 per cent in the past one year but the Fund manager continues with its aggressive strategy of holding big bets in select stocks. If it was software czars Infosys and Visualsoft in 2000, it is pharma companies Cipla and Pfizer in the current year. While courting a diversified portfolio, Birla Advantage has turned bullish on pharmaceutical sector. The Fund house is ambitious about the generic exports potential and new drug research activity of Indian drug companies. Despite the sharp dip, the fund has returned a healthy 19 percent in the last five years.

Or, take for instance, Pioneer ITI Bluechip. The fund has largely maintained a diversified portfolio while holding stock and sectoral exposure within prudent limits -- Infosys 8.98%, H C L Technologies (8.01 %), Larsen & Toubro (6.36%), I T C (5.87%) and VSNL (5.77%). Further, given its bluechip theme, the fund has stayed invested in large market cap, liquid stocks with active churning of holdings. While tilting in favour of growth stocks, the fund has maintained a steady mix between growth and cyclical counters. Thus, the fund's five-year return is a towering 27 percent. Ditto for Zurich India Equity, which has stayed invested in market leaders across different industries. Thus, this gives both diversification and liquidity to the portfolio.

...And, The Laggards
On the other hand, there is a common theme that binds the laggards. Importantly, most funds belong to public sector AMCs and Unit Trust of India. While holding reasonable assets under management, these fund houses have been hamstrung by the lack of a focussed investment strategy. The performance is also impacted due to the absence of a de-centralised decision making process. Further, bank-run mutual funds, thanks to their lineage have traditionally been under pressure to invest in poor quality companies with little room for due diligence. Frequent fund manager changes only add to poor numbers. Thus, it does not come as a surprise that some of the funds have lost as much as 11% in the last five years. In other words,the current NAV is only around Rs 4!

The Bottomline
If the fund is not professionally managed, it may still continue to Exist but will not generate healthy returns even in a decade. However, it Should not take you that long to realise that the fund is not worth keeping Your investments. The simplest way to know whether your fund holds promise is a periodic check of portfolio and peer group performance. In case the fund lags for a sustained period, it is time for a switchover!