Born Again?

Till recently, the story of LIC Mutual Fund (or Jeevan Bima Sahayog Asset Management Company, to give it its real name) was that of what could have been, but wasn't. The fund is promoted by one of the most trusted organisations in the country. It was an early entrant—the fourth, in 1989—into the business, and had a potentially deep reach through LIC's sales force. Despite these advantages, it did not become a dominant player and was surpassed by many fund houses that were launched years after it. However, the winds of change are now blowing strongly through this AMC and there is a flurry of activity that probably signifies a better future.

There's a new CEO, M. V. Suryanarayana, at the helm. Two hybrid funds, Dhanraksha '89 and Dhanasahayog have been repositioned by altering their investment patterns, and the closed-end Dhanvarsha (12) has become an open-end MIP. The AMC is also dropping the 'Dhan' prefix and changing the names of its funds. And led by the great performance of its flagship debt fund—LIC Bond Fund—LICMF's AUM has grown nearly 50 per cent over the last one year to reach Rs 3,434 crore by the end of November.

Background
When LIC launched its mutual fund in June 1989, only UTI, Canara Bank and State Bank of India were in the business before it. In its long 14-year history, LICMF has launched 36 mostly closed-end schemes of various types. Currently, it manages 14 open-end funds and two closed-end tax-planning funds. Being run by an insurance company meant that its first two funds, Dhanraksha '89 and Dhanavriddhi '89, also offered insurance and accident cover. Dhanraksha '89 was similar to UTI's Unit Linked Insurance Plan (ULIP). Recently, this fund has been renamed as LICMF Unit Linked Insurance Scheme and its equity-debt allocation has been revised with equity being raised from 40 per cent to 60 per cent. Similarly, Dhanasahayog had also been rechristened LICMF Balance and its equity mandate hiked from 40 to 60 per cent. Dhanavriddhi '89, which was an assured return product and was discontinued in May 2000.

Over the years, LICMF has let loose a flood of Dhan-this Dhan-that. Many performed poorly and did no great service to investors' dhan. Some, like Dhanvarsha (3), (4) and (5), had trouble keeping their assured return promises and the parent company had to dig into its reserves to pay back investors. Like Bollywood producers, LICMF persisted with an outdated formula that was once a hit for far too long—its last closed-end launch was made just five years ago (September 1998) and its first open-ended launch—LIC Bond Fund—was in May 1999.

Performance
However, the AMC is not without its star performers, LIC Bond and LIC Government Securities fund have one of the lowest expense ratios in their categories. LIC Bond is one of those rare funds that has invested heavily in corporate bonds and has a liking for corporate AA debt which has always played a larger role in its portfolio than gilts. Despite this bold approach, it hasn't been any more volatile than its peers. These factors probably explains why the fund is preferred enough for it to have become the sixth largest bond fund. Recently, this fund has started raising its gilt exposure, probably indicating a slight shift in strategy necessitating by having to manage a large corpus.

LIC MIP too has an excellent track record. In 2001 and 2002, it was among the top performing funds in the category. But in 2003, it has not increased its equity exposure as much as its peers and is lagging behind them. On the other hand, LIC Government Securities Fund is an average performer due to its conservative approach - its average maturity has been on the lower side in the category. This year, LIC Mutual fund has launched a short-term plan and is also planning a floating rate fund-which is probably a natural insurance-linked product.

LICMF's equity funds have always been managed funds conservatively and have never been quick on their feet in the face of changing market conditions. The performance of its diversified equity funds-LICMF Equity, nee Dhanvikas, and LICMF Growth nee Dhansamriddhi,-have been lacklustre despite their large-cap portfolios.

Curiously, the performance of LICMF's two index funds, which track the Nifty and Sensex, is also below par-their tracking error is higher than any other fund. This is because neither fund is fully invested. The two hybrid funds--Dhanraksha '89 and Dhanasahayog--have also been just average performers in the category. It remains to be seen how these funds perform after their new positioning.

Going Ahead
LIC Mutual Fund's debt products are competitive performance but the equity funds need a lot more attention and focus. Perhaps the fund house has a bright future in low cost debt products and conservative insurance-linked products, which would appear to be its natural areas of competence.

Strategy Note M.V. Suryanarayana CEO, LIC Mutual Fund

Investment Philosophy
For equity funds, our investment philosophy is to look at strong fundamentals and a good promoters' track record. Our investments are mainly in sectors with high growth potentials and within the sectors we take care to pick only the leaders. We also make selective investments in the well-researched mid-cap stocks that have good liquidity and a sound promoters' background. For debt instruments, we invest only in AA and above rated long-term debt instruments and P1+/A1+ etc in short-term instruments. In no case, we compromise on quality of the debt investments to get higher return.

Investment Process
Our research team assists the fund management department and an investment committee who are involved in the day to day decision making process. The recommendation to purchase or sale any equity shares is put up to the competent authority by the Fund management section based on the research reports generated internally as well as obtained from other broking houses. The decision for investment is taken after a thorough discussion amongst the research analysts, the fund manager and the members of the investment committee.

For debt investments, a detailed appraisal on the company along with its financials and rating is analysed before a decision is taken. The research team assists the fund management team for investment recommendations. Approved decisions are then passed on to the dealing team for execution. We have stringent internal norms for fund management so as to keep all our decision-making on track without loosing the focus on return maximisation. In recent times we have become more active both in debt and equity market which has paid off better returns till date.

Business Growth
We propose to launch new schemes depending upon investors' need for different products. We shall be growing in size both through launch of new schemes as well as through enhancing collection in the existing schemes, based on performance. We are open to mergers and acquisitions within the industry as and when need arise.

This article was originally published on December 26, 2003.