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A Conservative Player

Most of Chola funds have been average performers largely because of their extra cautious investment philosophy

Conservatism and steady returns have always been Chola's way of doing business. However, this extra-cautious strategy has translated into unexciting performance for its funds, and Chalamandalam AMC has now started trying much harder to beat the competition. Recently, the AMC enlarged its product basket by launching three funds - Chola Floating Rate Fund, Chola Midcap Fund and Chola Income Plus Fund. In all, the AMC manages three equity funds, six debt funds and six short-tem funds with total assets under management of Rs 1,281.22 crore as on August 31, 2004, and is currently placed at the twentieth position in terms of asset size.

Chola MF's extra conservatism is reflected in its investment style. While its income fund, Chola Triple Ace, always invests in top-rated bonds, Cholamandalam Growth, its equity fund, consistently maintains a portfolio of large-caps.

The outcome - Chola Triple Ace fund's 5-year return of 10.7 per cent lands in the middle of the category and the Cholamandalam Growth fund's return of 36.44 per cent in nearly three years of its existence also ranks among the average performers. Thus, the AMC's both core funds are low risk products.

Background

Despite coming into existence in 1996, nothing big has happened at Chola. There is a couple of factors for the same. The AMC has seen four persons at the CEO's desk - Dhawal Ravishankar, Ved Prakash Chaturvedi, M. Sivakumar and Sashi Krishnan (the current CEO). Then the AMC's joint venture with UK's Cazenove Investment Management came to an end in 2001. Since then, its entire ownership is with Cholamand-alam Investment & Finance Company, a part of the Chen-nai based Rs 5,200 crore Murugappa Group. Chola's product history has also been eventful with two of its funds being re-positioned. Chola Freedom Growth was launched as a diversified equity fund in 1997 but following the tech rally, it was converted into a technology fund in March 2000 and was renamed as Chola Freedom Technology. In December 2003, the same fund was again converted into a diversified equity fund and is now called Chola Opportunities. Moreover, Chola Freedom Income, which was launched in 1997 as an income fund, got converted into a short-term fund in March 2002.

Performance

As mentioned above, the AMC's flagship income fund Chola Triple Ace has been managed with a sharp eye on quality. In the past two years, the fund has always invested in AAA-rated corporate bonds and government securities. However, as these instruments carry relatively lower coupon, the fund has always remained an average performer in the category. In its over 7-year history, Chola Triple Ace has delivered an annualised return of 11.47 per cent. But the biggest cause of concern is its low asset base of Rs 65.37 crore.

Chola Gilt Investment is having an excellent time in the past few years. In 2003, it posted the third best return in the category (13.41 per cent). This was mainly on account of its strong gain in the mid-year rally of 2003. During this period, the fund actively raised its average maturity to 8-16 years. In 2004 too, the fund is up 2.63 per cent, as against the category average loss of 0.29 per cent till September 10, 2004. Following recent turbulence in the debt market, the average maturities of both Chola Triple Ace and Chola Gilt Investment have been brought down to under three years by increasing the cash allocation and reducing gilt exposure.

Chola MIP, which is the open-end version of the erstwhile closed-end Chola Monthly Income '98 Fund, has done good job in protecting investors' money so far. In 2004, this MIP is up 1.73 per cent, whereas the category is up 0.93 per cent. The fund's current equity allocation stands at 10.35 per cent, which can go up to 20 per cent as per the mandate. Chola Freedom Income Short-term and Chola Liquid funds are also average performers. Though the expense ratio of liquid fund is in line with its peers, that of short-term fund is on higher side.

Cholamandalam Growth is the core diversified equity fund. Launched in September 2001, it has focussed more on big companies. Hence, an average 90 per cent of its portfolio comprises of large-cap stocks. Though this strategy has not resulted in category beating performance in 2003 (101 per cent return against category average return of 112 per cent), but has managed to do well in the not so favourable 2004. It is up 1.92 per cent as against the category average loss of 1.55 per cent as on September 10, 2004. Chola Opportunities fund is a re-positioning of the erstwhile Chola Freedom Technology fund. This fund focuses on sectors, which have a perceivable and large competitive advantage in the global marketplace. Due to the selective sector exposure, this fund is for the aggressive investors. The fund is currently down 7.81 per cent this year till September 10, 2004. The fund currently has 50.67 per cent allocation to tech sector. Reason (as cited by the CEO, Sashi Krishnan): Presently, the tech sector has been performing well and is relatively insulated from the shocks of the monsoon and the increase in oil prices.

New Launches

In July this year, the AMC launched two funds - Chola Midcap and Chola Income Plus funds. The mid-cap fund invests in companies having market capitalisation of Rs 300-3,000 crore. On the other hand, the Income Plus fund is a conservative version of the MIP, whose equity allocation can go up to 10 per cent. In August, the fund house also launched a Floating Rate Fund, which is the most demanded and sought after product in recent times. Floating Rate funds work well when interest rates are expected to move up, which is the case now.

Going Ahead

The AMC is confident of itself given the fact that it believes to grow organically. But that is one side of the story. The fund house has not managed to attract large number of investors as seen from its low assets base. The investors' faith can only be achieved once its funds' performances move up the ladder from average to above average. Though the AMC has taken some initiative in terms of product expansion, a lot more is expected from this eight-year-old fund house.


Strategy Note

Sashi Krishnan, CEo, Chola MF

Investment Strategy

Our equity investment philosophy is centered on investing in quality stocks across sectors with promising medium to long-term potential. By use of rigorous analytical tools and techniques, we start with a clear focus on identifying stocks with strong competitive advantages and leadership status in their sectors. Management quality and stock liquidity are important filters used to arrive at a universe of stocks. Within this universe, stocks holding high potential of earnings growth in the medium term, restructuring possibilities and those quoting at attractive valuations on an absolute and relative basis are considered for investment.

In debt, the focus is centered on safety, liquidity and return. The highest emphasis is on safety. The bond funds invest in both rated corporate bonds/debentures having high credit quality and government securities. The investment philosophy is also to ensure that the portfolios of the bond funds are well diversified with not more than 10 to 15 per cent in any single security and no undue concentration in any one sector. Credit risk is monitored continuously. By investing in rated companies with a high credit quality, a large portion of the liquidity risk associated with the debt portfolio is taken care of. A clear and consistent view on future interest rate movements is taken to determine the duration that the bond funds are willing to expose themselves to. All our three bond funds have a CRISIL AAAf rating.

Five years down the line we see ourselves as a fund house that would provide complete investment solutions to investors. We would achieve this through the power of partnership and advice.