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Not Yet Completely There

Though a slow starter, DSP Merrill Lynch Mutual Fund is gradually making its mark

DSP Merrill Lynch Mutual Fund has an incredible pedigree. DSP Financial Consultants was a major domestic investment bank that tied up with the US-based Merrill Lynch to form one of India's leading investment banks: DSP Merrill Lynch (DSPML). DSPML, in turn, promoted DSP Merrill Lynch Mutual Fund. This fund family, however, has been a middle-of-the-road performer. With a formidable parent such as Merrill Lynch one would have expected a lot more action from this asset management company (AMC) than is visible. Having realised that it needs to do more, DSPML Mutual Fund is finally catching up now. In the past year, its assets under management have grown by 50 per cent to Rs 2,900 crore, making it the 11th-largest AMC in India, as on January 31, 2003. That apart, it recently launched two new schemes: DSPML Top 100 Equity and DSPML Savings Plus.

While most mutual funds have done well on the back of their core funds, DSPML Mutual Fund's recent success has been outside the core. For instance, while DSPML Equity Fund ended the year 2002 at the bottom, DSPML Opportunity Fund performed exceptionally well—it was ranked among the top 25 per cent in the category. On the debt side, the fund house's gilt fund, DSPML GSF Longer Duration, has been a good performer vis-a-vis DSPML Bond Fund.

Overall, barring DSPML Equity Fund, other schemes in the fund family have done better over the long term. One of the reasons for this has been low expenses. Almost all DSPML funds boast of below-average expense ratio in their respective categories, giving them an edge over competition.

Background

DSP Merrill Lynch Investment Managers was incorporated in December 1996 as a 60:40 joint venture between DSPML and Merrill Lynch Investment Mana-gers of the US. However, last year, DSPML bought the latter's 40 per cent stake in the AMC. Merrill Lynch continues to hold a indirect stake in the AMC through its 40 per cent stake in DSPML. Before making a formal entry in India, Merrill Lynch did a due-diligence for almost two years. Finally, it joined hands with Hemendra Kothari's DSP Financial Consultants (now DSPML) to set up the AMC, which launched its first two products, DSPML Equity and DSPML Bond Fund, in April 1997.

Performance
The fund house's flagship scheme, DSPML Bond Fund, has a consistent record of stable performance. This scheme's 3- and 5-year annualised returns of 12.92 per cent and 12.87 per cent, respectively, as on February 25, 2003, figure among the category toppers. DSPML Bond Fund, unlike its peers, takes little credit risk and sticks to high-quality bonds and gilts. Among the first few to tap government securities market in 1998, this gilt-tilted fund largely maintained higher average maturity and thus benefited from the debt market rally. However, in recent months, due to a rise in yields the fund has reduced its average maturity.

Its gilt fund, DSPML GSF Longer Duration, boasts of one of the best risk-reward profile in the category. Its trailing 1- and 2-year returns are ranked in the category's upper 25 per cent. The fund owes much of its success to active duration management and astute security selection. However, occasional bumps are expected here as DSPML GSF Longer Duration's portfolio is spread across select gilts, which makes this aggressive fund a volatile offering.

Among equity funds, DSPML Equity hasn't had a strong showing. Over six years, this fund has failed to deliver the goods. Except during the rising market of 2000, it has mostly lagged its peers and the benchmark S&P CNX Nifty. Despite being more volatile than the benchmark, DSPML Equity has failed to generate higher returns. In 2002, it managed a 9.11 per cent return vis-a-vis category's 18.56 per cent return. The fund's unlisted holdings, primarily SIP Technologies, were one of the reasons for its poor performance. Again, unlisted holdings had a role to play in DSPML Balanced fund's average performance.

On the other hand, DSPML Opportunity ended the year 2002 with a bang. It was up 25.75 per cent, securing its place among the best in the category. This fund is a real opportunist in the sense that it re-aligns its investment across sectors with changing economic cycles. DSPML Technology.com fund too had a good run in 2002 ending the year as the third-best technol-ogy fund in the category.

Strategies and Risk Control Measures
The fund house follows a combination of top-down and bottom-up investment approach by focusing on macro variables. Concentrating on long-term benefits, this AMC does not believe in overnight gains. This was evid-ent in DSPML Equity Fund's investment style, which made heavy investments in index stocks. The equity managers follow a certain risk-control strategy that revolves around maintaining positions in line with that of the benchmark. At the sector level, it has a deviation limit of +/-15 per cent from the benchmark. Similarly, at the stock level, it has a deviation limit of +/-10 per cent.

On the debt side, DSPML Mutual Fund is focused on delivering optimum and consistent returns by controlling price risk and by minimising credit and liquidity risks. The AMC tackles credit risk by maintaining high credit quality. It minimises liquidity risk by buying the more frequently-traded bonds, which can be sold more easily. Price risk is managed by extending or reducing the average maturity of the portfolio, depending on the fund manager's view about interest rate trends over the short- and medium-term. This strategy has paid dividends with DSPML Mutual Fund's debt funds posting above-average returns in the last two years.

While this AMC may have followed a consistent strategy, it hasn't been so consistent with fund managers. Till 1999, S. Naganath was the chief investment officer (CIO). Then R. Sreesankaran took over. Again, in 2002, S. Naganath was back in the AMC as joint president and CIO. This constant reshuffle may have been responsible for the poor performance of the AMC's equ-ity and balanced funds.

Products: Some More
To increase its investor base, this fund is slowly expanding its product range. In February this year, the AMC launched two new schemes: DSPML Top 100 Equity and DSPML Savings Plus. The former will pick stocks of 100 largest companies by market capitalisation. The latter is primarily a debt fund (80-100 per cent) with marginal exposure to equities (a maximum of 20 per cent). This fund's equity allocation will resemble that of the Top 100 Equity Fund. Also, on the cards is a floating rate fund. Such a fund is also needed as the debt segment is expanding, besides more innovative products are required in a market which is full of plain-vanilla bond funds. With these launches the AMC has a diverse portfolio across equity and debt funds. The challenge, however, will be to grow these in terms of both size and performance. As new products are added, the fund house is also expanding its distribution channel across India. It has also tied up with Union Bank of India and Bank of India to sell its schemes. The thrust is on building a robust third-party distribution platform to expand its business.

The Way Ahead
All told, DSPML Mutual Fund is finally coming of age. A decent performance in the recent past and product launches bear testimony to this. In an industry where consolidation is now the name of the game, this fund house still prefers to focus on organic growth. This reflects the AMC's confidence in itself. But the fund still has some way to go before it truly becomes a '100 per cent money manager'.