If fund companies were people, then Alliance Capital would be a formerly wild and flashy teenager, who is now settling down to a more sober adulthood. Alliance has been one of the most successful asset management companies (AMC) in India. From its inception in 1995, it has grown to be India's third largest AMC in terms of equity assets, with a total of Rs 3,806 crore under management.
What characterises Alliance is the extremely proactive, aggressive and belief-driven equity investment style that it has displayed right from the beginning. This is a fund family that is very well-suited to investors who believe that aggression is the best way to tackle to the task of making money on the street. Its successes and lately, its failures have resulted from this approach.
Alliance was an early believer in the technology sector. Led by its high profile fund manager Samir Arora, one of Alliance's early investor newsletters declared technology and telecom to be explosive growth sectors. This belief took Alliance's performance to dizzy heights throughout the tech boom, and, in a now-familiar story, to the very bottom by 2001.
The kind of exposure that major Alliance funds had to technology in the sector's heyday (40 per cent in March 1999, which zoomed to 70 per cent a year after) was—in hindsight—frightening. For a fund that had sold itself to investors as a diversified equity fund to have 70 per cent in one single, narrowly-focussed sector was a complete betrayal of the basic tenets of fund management. Obviously, investors paid heavily for this when the collapse came.
To be fair, once the tech collapse started, Alliance does seem to have managed its exits somewhat better than many others—despite many tech stocks collapsing by 80-90 per cent and the BSE IT index by 83 per cent from its peak in February 2000, while Alliance Equity is down 65 per cent over the same period. Ofcourse this is cold comfort indeed for those that lost so much in the fund. Curiously, despite its strong belief and understanding of the technology sector, Alliance only launched its tech sector fund, Alliance New Millennium in January 2000, when the tech boom was almost old news. With its diversified funds invested like tech sector funds in disguise, it probably didn't feel the need for one. To be sure, tech was not the only reason for Alliance's great performance. The fund has done well with many other multi-baggers like Zee Telefilms and HDFC Bank.
Alliance looks at investments on a 'bottom up' basis, i.e. first identifying good companies and then validating them against more macro parameters. The most crucial factors in its investment decisions are normally companies with strong management, internally funded growth and stability of performance. It tries to shun companies that are in a commodity business or are overly dependent on the government policies for growth. It believes that such companies are insufficiently in control of their own future.
The fund believes that retailing, mobile telephony, cable television and information technology enabled services (ITES) will be where its future star investments will come from. However, it is difficult to see major scrips in these sectors generating the kinds of returns that its earlier favourites like software services and media did.
Alliance's approach to debt has undergone an adjustment over the last two years. Earlier, it was focused on taking credit calls—trying to identify companies with relatively low ratings that would later improve in the markets' perception. However, this equity-like strategy worked less well than the kind of duration-management strategies that other funds followed and lately, Alliance has also shifted its approach.
In any case, Alliance is far more equity-focused than many other AMCs. Forty per cent of the assets it manages are in equity and hybrid funds, far more than the 0-22 per cent that are normal for others. After the tech wreck, Alliance is more diversified today—the top three sectors account for 58 per cent—and has a higher orientation towards the quality of individual holdings than towards hot sectors. Two years ago, the top three sectors accounted for an astounding 87 per cent of its holdings. An equity-focused AMC like Alliance will be of more interest to the growth-led investor.
Alliance is one of the few funds whose investment-management hierarchies are completely integrated across all emerging markets in the region. The head honcho Samir Arora is designated 'Vice President and Asian Emerging Market Portfolio Manager' and heads all fund management for Korea, Taiwan, India, China, Malaysia, Philippines, Indonesia and Thailand out of his Singapore base.
The individual analysts also manage investments in their sectors across all these countries. Alliance believes that this structure helps them evaluate companies in a broader perspective.
The hierarchy for managing income funds is different—Alliance has a team of two, which does everything from research, dealing and portfolio management of its five debt funds and reports to Alliance India Chief Executive Officer Nikhil Johri. There are other ways in which Alliance's fund management process is more integrated with its global parent than that of other AMCs. Arora has worked with Alliance in the US before he came to Asia. There is also interaction between analysts covering a particular sector across countries. Regular global conference calls are a routine part of the Alliance's modus operandi. Perhaps the best thing that can be said about Alliance is that, with its fund management led by a man of decidedly strong opinions, it is a fund with a distinct personality and style. If you are comfortable with this personality, you are likely to enjoy the adventures your money has in the company of Mr. Arora.
This article was originally published on November 20, 2002.
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