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Early bird gets the returns

Funds which were the first to shift to value strategies, cyclical stocks and domestic plays, did vastly better than slow-to-react peers

Has the post-election bull-run taken your by surprise? Many portfolios seemed to have been taken by surprise too. While sheer market momentum has lifted the one-year return on most equity funds, there is a yawning divergence in returns between equity funds even those belonging to the same category or fund house. Here's why some funds beat their benchmarks by big margins and made the most of this rally.

Deep value wins
Mid- and small-cap funds were the stars of this rally, with the category notching up a 43 per cent gain for one year. But just consider the deep divide between the leaders and laggards in this category: top rankers such as Birla Pure Value Fund (78 per cent return), Reliance Small Cap (71 per cent), Sahara Star Value (65 per cent), HSBC Midcap Equity (61 per cent) or ICICI Prudential Midcap (58 per cent) have delivered over twice the returns managed by laggards such as SBI Emerging Business (16 per cent), Escorts Leading Sectors (27 per cent) or Birla Dividend Yield Plus (28 per cent).

The universe of mid- and small-cap stocks available to fund managers in India is vast. In the last one year, fund managers who were brave enough to pack their portfolios with the most battered stocks, those trading at rock bottom price-earnings multiples or big discounts to book value, made maximum gains in the rebound. Those who played it safe with mature companies or defensive strategies lost the race.

Mahesh Patil, CIO of Birla Sun Life Mutual Fund, explains why Birla Pure Value trounced the Dividend Yield Fund by such a big margin; "Birla Pure Value fund focuses only on companies which are out of favour and quoting at a significant discount to their long term valuations. Such beaten down stocks may not have strong earnings to pay out dividends but could have good assets which can generate cash flows as the economy recovers. As market sentiment has improved, these beaten down stocks have been re-rated even without any change in their earnings. But the Dividend Yield Fund focuses on quality companies which generate good cash flows and are paying out dividends regularly.”

Stock selection scores
Moving on to Multi-cap Funds (average 30 per cent in one year), top rankers such as Tata Equity PE (42 per cent gain in one year), Principal Growth (40 per cent), L&T India Value (40 per cent) and HDFC Core & Satellite (39 per cent) again delivered over twice the returns of SBI Contra, Templeton India Equity Income Fund or the clutch of Junior Nifty funds.

In this category, funds with a higher mid-cap stock weightage fared the best, while sizeable large-cap allocations proved counter-productive to portfolios. But it is clear that stock and sector selection mattered far more than even these market-cap based allocations.

Principal Growth Fund isn't over-weight on midcaps and isn't a value fund and yet scored with spot-on stock picks such as Motherson Sumi, Aurobindo Pharma, ICICI Bank and ONGC which made the most of this rally. Though a truly contrarian fund should have worked wonders in this market reversal, SBI Contra's over-weight positions in technology, autos and healthcare, seem to have weighed on its returns. The focus on dividend yield stocks as well as its international exposure seem to have reduced returns for Templeton India Equity Income Fund within this category.

Early birds
Turn to the Large-cap category and despite the limited investment universe of stocks, significant return divergence was evident here too. While ICICI Prudential Top 100, HDFC Top 200, Most Shares M50 ruled the roost with 31 -35 per cent returns for one year, the Religare Invesco AGILE lagged with just a 5 per cent gain. Clearly real-life fund managers did better than quantitative strategies. In this segment, funds focussing on the bluest of the blue-chips, Nifty stocks or sector leaders actually lost out to those that selected stocks from a wider investment universe. While HDFC Top 200 has made a dramatic comeback with high beta stock picks, ICICI Prudential has won by going underweight on the so-called defensives much before the market turned away from them.

“You now have a situation where the consumer names, quality banks, technology and so on, have not done well. We have been underweight on consumer for 2-3 years because the sector was very costly. We are still looking to book profits on defensive stocks and will put that money into cyclicals”, says Sankaran Naren, Chief Investment Officer of ICICI Prudential.

Overall, equity fund managers who caught to the following trends early scored big wins in this rally while others missed the bus - a shift from defensive sectors to cyclicals, a shift from mature, growth stocks to beaten-down ones and a move from dollar-earners to domestic plays.