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Sinking Performance

DWS Investment Opportunity’s lack of strategy has turned it into a go-anywhere fund in the true sense of the word…

This is one is a go- anywhere fund in the true sense of the word
It has no market capitalization bias and neither does it have any sector or thematic restrictions. The flexibility even extends to its asset allocation. The equity allocation can move between 5 and 100 per cent, with the balance going into money market instruments, cash and debt securities.

Despite the positioning as an open-ended dynamic allocation scheme, the reality does not bear this out. The fund’s stated objective permits it to actively invest in different assets classes as per the market conditions. Only on three occasions (based on monthly portfolio disclosures) has the equity allocation dipped to below 80 per cent and since launch the equity allocation has averaged around 92.85 per cent.

The fund started with a portfolio that had a dominant large-cap tilt. It was only from 2006 onwards that the allocation to smaller stocks began to get more generous. In January 2008, the large-cap allocation of the fund touched a low of 41 per cent but rose to 78 per cent by April 2009. Currently, the fund holds 58 per cent of its assets in large caps. These variations in its market cap holdings saw it fall into different categories. From ‘Equity: Large & Mid Cap’, it has fit into the ‘Equity: Multi Cap’ category since 2008.

Although not around for a very long time, the fund has seen its share of ups and downs, in terms of performance. Launched in January 2004, after a decent start, DWS Investment Opportunity was the worst performer in 2005 in its category of ‘Equity: Large & Mid Cap’. The aggressive bet on Metals was possibly the culprit. That year BSE Metal was the worst performing index.
But the very next year, the fund saw a turnaround in the performance. In 2006 it grabbed the sixth rank among 41 funds and beat the category average by a margin of over 10 per cent.

Though performance improved in 2006, it was only when Inamdar took over in June 2007 that it began to impress. A return of 90 per cent that year made it the best performer in its category of 48 funds.
Inamdar displayed the ability to successfully chart his own course. The fund was an extremely risky proposition which would attract only the boldest of investors. For instance, in February 2006, the number of stocks was just 17 with the top five holdings accounting for 44.62 per cent. The portfolio was not even laden with large caps but had a 44 per cent tilt towards mid- and small-caps.

When Inamdar took over, diversification topped his agenda. From 27 stocks in April 2007, it was increased to 39 stocks within nine months. Despite Real Estate doing pretty well, he refrained from investing in real estate developers and preferred to cast his lot with companies that owned land banks such as JP Associates, Century Textiles and Bombay Dyeing. But when Construction and Real Estate began to zoom, he succumbed to the temptation and bought Marg Ltd, Supreme Infrastructure India Ltd and HCC in December 2007. These picks, along with the Metals and Energy allocation of 12.71 per cent and 16.71 per cent, respectively in December 2007, is probably what contributed to the superb performance (BSE Metals delivered 121.47% and BSE Oil & Gas, 115.25% in 2007). When real estate stocks collapsed early 2008 he exited from the above three stocks.

In September 2007 he had stated that the prices of commodities like iron ore, coal and bauxite are faced with limited supply but strong demand in countries like India and China. He believed that natural resources companies looked promising on a demand-supply basis and also felt that valuations at that time were not demanding if seen with this perspective. So he picked up stocks like Sterlite Industries, Tata Steel, Ashapura Minechem and Gujarat NRE Coke, in addition to Kalyani Steels and SAIL which were already in his portfolio. From a 5.13 per cent allocation to metal stocks in October 2007, it went up to 13.41 per cent the very next month. Inamdar’s changes showed visible results in terms of performance. In both quarters that year (September and December 2007), the fund beat its peers by impressive margins.

Investors began to notice this fund and assets grew from a tiny Rs 9.62 crore (June 2007) to Rs 162.01 crore (September 2008). In fact the fund saw a rise in assets in 2008, despite negative returns, signifying strong inflows. The unit capital of the fund increased by around 14x over this period.
From being a top quartile performer in 2007 (Equity: Large & Mid Cap) it slipped to a second quartile slot in 2008 (Equity: Multi Cap). In the first two quarters that year, the fund held its ground and curtailed its fall to a lower level than the category average. After that it struggled. Come 2009 and the fund found itself at the bottom of the third quartile. In February that year, the equity allocation was 77 per cent. Unexpectedly the market began to rally in March and caught Inamdar on the wrong foot. It was only in May that he managed to get the equity exposure up to 98 per cent.

What worked for Inamdar initially was his ability to recognize timely opportunities and capitalize on them. That did not work in 2009 when he missed out on the rally in Autos. Unfortunately, the sector accounted for only 2 per cent of the fund’s portfolio and that too only for a few months (BSE Auto delivered over 200%). Instead the fund was heavy in Energy, more specifically Oil & Gas. The exposure to FMCG also did not help too much. For the quarter ended June 2009, BSE FMCG and BSE Oil & Gas were amongst the worst performing sectoral indices. Naturally this got reflected in the fund’s performance which delivered 8 per cent below the category average that quarter.
The streak of bad luck did not end there. In 2010, the fund found itself in the fourth quartile.

In 2010, between March and May the exposure to Financial Services dropped though it increased after that. But by and large, the fund was underweight on Financial Services as compared to its peers.
Inamdar also increased exposure to small caps; his small-cap exposure average around 20 per cent in 2010.
Unfortunately for him, BSE Small Cap underperformed the Sensex while BSE Bankex was amongst the best performing indices last year.

Given that this is an opportunistic fund, one should expect some amount of volatility. However, what’s disturbing is the continued sustained underperformance. This year, when the category on an average has lost 7.87 per cent, the fund has lost 11.45 per cent (June 30, 2011).
A reverse of fortune has taken place and outflows have resulted in the unit capital of the fund dropping 45 per cent between March 2009 and March 2011.
While we have not completely written off this fund, we would not recommend fresh investments into it. Those already invested must monitor performance carefully and adopt a wait-and-watch stance.