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Who Wrote History in 2004

Diversified equity funds began 2004 on a shaky ground but ended with a bang. Let's see which funds created history and how they managed the ups and downs of the stock market

Magnum Global
Return in 2004: 68.35%
Assets on Dec 31, 04: 91.20 crore

Magnum Global made the most out of 2004. The fund outperformed its average peers in all the four quarters by a good margin and gained 68.35 per cent as against the category average return of 26.32 per cent. In the first quarter, when equity markets were on their way down, it kept a check on the loss. In the second quarter, when diversified funds were down over 7 per cent, the fund managed a positive return of 0.46 per cent and continued its good show till the end of the year to top the returns chart.

A high exposure to mid- and small-caps did the trick for the fund. Large caps completely went out of favour-the fund reduced exposure from 82 per cent in January to nil in November 2004. On the other hand, exposure to mid- and small-cap stocks went up from 12.96 and 4.92 per cent respectively in January to 66 and 28.68 per cent respectively in November. During the same period, while CNX Midcap 200 rallied 26.59 per cent, the Sensex could manage only 6.77 per cent. The fund managed the volatility of mid- and small-caps very well through a well-diversified portfolio and keeping exposure to a single stock below 5 per cent on most occasions. The fund's buy-and-hold strategy has also proved very lucrative. For example, Thermax has found a place in the top five holdings of the fund from February 2004 and since then, the stock has appreciated nearly 40 per cent. Though the fund has topped the performance chart by playing the mid-cap card very well in 2004, its past performance is discouraging-from 2000 to 2003, it has always underperformed the category average and needs to prove itself for more time.

Magnum Contra
Return in 2004: 64.26%
Assets on Dec 31, 04: 146.93 crore

Sandip Sabharwal must be a proud fund manager-two of his funds have grabbed the top two positions. Though there is not much difference between the returns that this fund and Magnum Global have generated, Magnum Contra has achieved it by not betting too high on the relatively riskier mid- and small-caps.

Like Magnum Global, Sabharwal managed a category beating performance in all the four quarters of 2004 for this fund as well. In the first quarter, when average diversified funds were down nearly 4 per cent, this fund prevented its fall though an average 71 per cent exposure to large-caps-the fund lost only 0.88 per cent. In the same period, the Sensex was down 4.25 per cent and the CNX Midcap tumbled 10.67 per cent. In the second quarter as well, the fund followed the same strategy and beat the category average by a huge margin-in fact, it gained 3.21 per cent against the 7.86 per cent loss of its average peers. Magnum Contra consistently increased exposure to mid- and small-caps from 12.43 and 10.55 per cent respectively in January to 35.98 and 22.35 per cent respectively in November 2004. However, the fund also maintained a decent exposure to large-caps throughout-35 per cent as on November 30, 2004. Sabharwal manages Magnum Contra in a relatively aggressive fashion. He does not hesitate to take high exposure to any particular stock or sector if he is convinced about it. For example, allocation to Gujarat Ambuja Cements had touched 9.51 per cent of total assets in August this year. This fund has a good track record. A 25.80 per cent return since launch in July 1999 and a large-cap orientation make it a better choice for long-term investors.

Alliance Buy India
Return in 2004: 51.76%
Assets on Dec 31, 04: Rs 31.53 crore

Under hammer in the first quarter of 2004, this fund has staged a strong comeback as one of the top five performing funds of the year.

It signed off 2004 up 51.76 per cent as against the category average return of 26.32 per cent. However, the road to success was bumpy, at least during the first few months of last year when the stock market was on its way down after peaking in January. The fund plunged in January and lost 8.27 per cent against the category average return of negative 3.86 per cent.

It consolidated in February but again dived in March to end the first quarter down over 10 per cent against the 4.06 per cent loss of average peers. A mid- and small-cap heavy portfolio proved disastrous for the fund. In fact, large-caps were completely out from the portfolio in February and March, while the fund had 8 per cent exposure to them in January. During the first quarter of 2004, mid-caps lost heavily-the CNX Midcap Index fell 10.67 per cent and the Sensex lost 4.25 per cent.

However, the fund continued with its mid-cap oriented portfolio and benefited when the mid-cap season returned during the later part of the year. It gained over 5 per cent in the second quarter when its average peers were still in red. The fund followed it with a 20.42 and 31.14 per cent return in the next two quarters, respectively, to become one of the hottest funds of 2004.

Last year, the fund banked heavily on health sector to generate healthy returns. In September, the exposure to the sector touched a whopping 41.89 per cent of the portfolio. Given its small size, the fund aggressively bets on individual stocks with its top five holdings often crossing 50 per cent mark. This is a risky proposition, as the strategy reduces the scope for diversity. Since the fund banks heavily on relatively risky mid- and small-caps, diversity is the last thing that it should compromise with. Historically, the fund has nothing to boast about except for its show in 2004. Since its launch in January 2000, the fund has returned just 5.93 per cent. In the volatile periods of 2001, the fund lost less than its average peers but followed it up with a poor show in 2002 and 2003.

HDFC Capital Builder
Return in 2004: 47.55%
Assets on Dec 31, 04: Rs 562.35 crore

Gaining in a booming market is important but guarding the returns when the markets tank is crucial. This fund has done exactly this. It steadily made its way to the top in 2004 without taking much risk.

In the volatile first quarter of last year, when average diversified funds were down 4.06 per cent, HDFC Capital Builder lost marginally less at 4.04 per cent. This was made possible because, unlike most top performers of 2004, the fund had around 18 per cent exposure to large-caps, which lost less as compared to mid-caps.

In the next quarter, when the May mayhem turned the equity markets upside down, this fund guarded its return extremely well-it lost just 0.92 per cent against the 7.86 per cent loss of its average peers. In May too, when average diversified funds were down 14.76 per cent, it lost less at 12.86 per cent.

When good times returned to the equity markets, it rallied and ended the next two quarters up 22 and 25.40 per cent to secure a place in the group of top five funds of 2004. The fund's portfolio looks much more stable than some of its peers. Though it has a bias towards relatively flashy mid- and small-caps, it did not ignore the stability of large-caps in 2004. In fact at the end of December 2004, exposure to large-caps was at 40.97 per cent against 19.92 per cent in January 2004.

At the stock level also, the fund looks better placed to manage the volatility with ease-barring a few occasions, no single stock has crossed the 6 per cent mark. It also plays the sector call conservatively with no sector accounting for more than 14 per cent in 2004.

Historically, the fund has a decent track record. Barring 2001, it has always managed a place in the top half of the category. The fund did extremely well in 2000 when diversified funds posted a negative return of 24.82 per cent. It lost 17.17 per cent and was ranked seventh in the category.

An annualised return of more than 11 per cent since launch in 1994 and a well-diversified portfolio makes the fund an attractive choice.

Alliance Equity
Return in 2004: 43.99%
Assets on Dec 31, 04: Rs 261.15 crore

This fund has put up a consistent show throughout 2004. Performance-wise, it has not done anything extraordinary but the fund guarded its returns in bad times and gained a bit more than its average peers when equity markets rallied. Alliance Equity ended 2004 up 43.99 per cent as against the 26.32 per cent return of average diversified funds.

Like most of the hot funds in 2004, Alliance Equity too managed the volatile first two quarters extremely well and outperformed the category average returns in four of the six months. In May, though, when the equity markets plunged due to an unexpected Parliamentary poll results, the fund lost heavily-it ended the month down a whopping 17.78 per cent as against the category average loss of 14.76 per cent.

However, a good show in April and June saved the fund from sinking. It ended the second quarter down 4.74 per cent as compared to 7.86 per cent loss of its average peers. In the next two quarters, the fund blossomed and managed to find a place among the top performers of 2004.

A judicious mixture of mid- and large-cap stocks did the trick for the fund. While it played the mid-cap card quite effectively, the fund managed its downside risk by maintaining a good exposure to large-cap stocks. While Alliance Equity maintained an average 37 per cent exposure to large-caps throughout 2004, it constantly increased investments in mid-caps but reduced dependence on the relatively risky small-caps.

At the stock level, the fund does not hesitate to bet high on individual stocks. Throughout 2004, the top-five holdings of the fund accounted for more than 33 per cent of assets of the fund.

Historically, the fund has a decent long-term performance record. Barring 2001 and 2002, it has managed the equity markets very well and delivered a whopping 37.92 per cent return since its launch in August 1998.