When Funds Derail from Their Investment Mandate | Value Research Some tech funds with large cash holdings have been the culprits this year and failed to capitalise on recent gains. They must realise that extra caution seldom pays since taking no risk could also be a great risk

When Funds Derail from Their Investment Mandate

Some tech funds with large cash holdings have been the culprits this year and failed to capitalise on recent gains. They must realise that extra caution seldom pays since taking no risk could also be a great risk

Fund managers have a simple task on their hands – stick to the investment mandate and earn returns for investors. Defined investment strategies guide both investment decisions and help investors set realistic expectations. Yet, the past is replete with instances, where the community has broken the barrier in search of superlative returns. Interestingly, it has happened across fund categories. The reasons for the deviation could be several - peer pressures, fund's poor performance, strong gains in one asset class or sector, a pure defensive ploy, enhancing personal performance or simple boredom from the existing investment pattern.

The Indian fund industry suffered from the assured return syndrome, which saw funds derail in favour of equities on numerous occasions to deliver guaranteed income. For instance, assured-return monthly income plans were structured as conservative balanced funds but went overboard with equities once return on debt started to go down. The result – sharp losses and below par NAVs. Bank-sponsored AMCs had a similar recipe for disaster with assured returns (Magnum Triple Plus, BoI Double Square Plus) on the back of an aggressive equity portfolio. However, hassled sponsors had to eventually bail them out.

The biggest disappointment of all has been US-64, which stuck to its "social" objective of a liberal annual dividend with a large equity exposure and thus, lost its balance. Other balanced funds were also a culprit last year – they went gung-ho in the technology bull-run with equity investments crossing 70% in some instances. No wonder; some lost as much as equity funds. It was ditto for equity funds, which were dazzled by technology stocks but eventually landed with sharply depleted NAVs. This year, some cash funds posted negative returns since a part of the portfolio was marked-to-market. However, going by the mandate, cash funds can stay insulated from interest rate gyrations by strictly investing in bonds with less than six-month maturity. A similar story could be repeated in bond funds as fund managers go overboard with their gilt exposure to log in capital gains.

And now, while equity and balanced funds have largely diversified their portfolios, some technology funds have gone on the other extreme of caution with a big cash position. For instance, Chola Freedom Technology has upped its money market component from 37% in early 2001 to the current level of 64%. Ditto for Birla IT, where cash holding has zoomed from 29% to over 55% in nine months. However, cash umbrella may not always be the panacea for survival in a bearish market with the technology bulwark simply shooting northwards in the last fortnight. After suffering heavy losses with concentrated portfolios, missing these intermittent spurts could be another source of embarrassment for these rattled fund managers.

In the last 15 days, for instance, BSE IT Index has galloped by nearly 16% while technology funds are up average 10.7%. Thus, it is not surprising that funds sitting on a pile of cash have been caught on the wrong foot as they sidestepped their charter. While Chola Freedom Technology has moved up only 5.92%, Birla IT has also been a below category performer with a gain of 8.6%. Magnum IT, another fund with 40% in cash, has been the worst – up only 4.15%. On the other hand, some of their aggressive peers have logged in bountiful returns on the back of nearly fully invested portfolios. UTI Software is up 17% for the week while Alliance New Millennium has advanced by 13.52%. Thus, if you are a firm believer in technology, you will be ruing your decision if you own investments in one of the laggards in the recent spurt.

Anyway, cash has also not proved to be a big cushion against fall in NAV – while the top loser has shed 62% year-to-date, Birla IT and Magnum IT have lost 50% and 59%, respectively. Thus, investors in these funds have also gone through a lot of stomach churning. On the other hand, the more diversified funds (exposure to technology-dependent companies) with fully invested portfolios have performed better. For instance, Pioneer ITI Internet Opportunities is down 41% in the last nine months.

Unlikely to Succeed
Fund managers must realise that extra caution seldom pays since taking no risk could also be a great risk. Large cash holding for a long period in sectoral fund does not send the right signal since it reflects that the fund manager is unsure about the prospects of the sector. He is unwilling to even selectively pick up fundamentally strong bets despite a plunge in prices. Thus, it is important that technology funds start to invest judiciously and with conviction. Else, when the market goes up, (and it often goes up rapidly!) these funds will be left with only worthless moneybags!

Other Categories