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Fund Manager, Sandip Sabharwal comments on Magnum Balanced Fund's Portfolio Composition.

"We evaluate the stock for its management style, adaptability to external environment, long term growth strategy, pricing power and their earnings potential"

With two bonus issues and a dividend payout since its launch in October 1995, Magnum Balanced Fund has returned an annualized 18.63% since launch. The Fund's penchant for mid-cap stocks along with a higher allocation to growth sectors like FMCG, Pharma and Healthcare notched up a whooping 192% gain in the year 1999, while suffering heavily in 2000. On the debt side the fund has largely maintained a passive stance.

Sandip Sabharwal who manages the Magnum Balanced Fund talks about the debt portfolio in an interview with Value Research.

Q. We would like to know the maturity and rating profile of your debt component for November and also for the previous months of 2000? Further, your debt portfolio has been very much static. Please elaborate on your strategy for the debt portfolio.
SS: Our strategy as far as the debt portfolio goes, is to have investments in debt instruments, which are of the best safety profile and are preferably AAA rated instruments. Our portfolio as far as debt goes is more or less stable because of the fact that during the poor conditions in the capital markets there have not been much inflows into the fund and as such we are comfortable with the quality of the current debt portfolio. Right now we are preferring a higher duration to the portfolio as we feel that the long term trends for interest rates in the market point towards a declining interest rate environment going forward.

Q. You do not have allocation to gilts even though you place a lot of emphasis on the safety of your debt portfolio. Your comments.
SS: We do have an exposure to gilts, which have been nearly 20% of the porfolio. Gilts are also used as treasury products and since they are extremely liquid, unlike corporate debt we have active trading in gilts.

Q. It is only since the past few months that you have hiked allocation to debt. Is the allocation likely to continue or is it dependent on the performance of the equity markets - hiking the exposure during the dull equity markets and vice-versa?
SS: Ours is a dynamic portfolio allocation process where the allocation to debt and equity depends on our views and outlook on both, interest rates and the stock markets. Overall under normal circumstances the allocation to equity would be in the range of 60-70%. However under the current market conditions where the outlook for the equity markets are highly uncertain we are maintaining a ratio of approximately 62:38 in equity and debt. However our equity exposure will be restricted to a maximum of 70% under all circumstances.

Q. What is your stock picking strategy? What other parameters apart from a competitive edge and a strong financial strength do you look for?
SS: Our stock picking strategy is essentially bottom up and besides the above we look at a number of qualitative and quantitative factors. For instance, the quality and depth of the management and their ability to respond to the changes in their working environment, whether the company has a valid franchise in terms of proprietary goods or services which they can leverage, earnings visibility and long term growth strategies of the company. We also look at the ability of the company to withstand external shocks and the pricing power that it has for its products.

Q. How do you justify your higher allocation to mid-cap stocks?
SS: We do have a reasonable amount of exposure to mid-cap stocks, however these are only in those companies where the management of the company is excellent or the company has highly innovative product lines which can help the company grow at above market rates going forward. Most of the mid-cap stocks that you see in our portfolio are stocks where our fund has been one of the first ones to invest in that company and we have very good relationships with the management. As such we are able to keep an active track of the performance of the company. These investments are typically made after a long drawn process of research, plant visits and meetings with various layers of management of the company. All of these companies have a certain unique proposition to sell which makes them potential blue chips of the future.

Q. Which are the other sectors, outside the infotech sector, around which the core portfolio of the fund is formed?
SS: We have significantly reduced our exposure to the infotech sector over the past six months. Our portfolio today is reasonably diversified with exposure to stocks in across a wide range of sectors. We have exposure to diversified stocks like Reliance and Larsen & Toubro, Pharma stocks like Cipla and Dr Reddys, Content providers like Mukta Arts and stocks like Vikas WSP. Six out of the top ten stocks in the portfolio as of date are from the non-TMT sectors. The total exposure to TMT in our portfolio as on date would be around 40% and among these are stocks like Aftek Infosys, Shyam Telecom and Ramco Systems over whose business prospects we are extremely positive and we believe these stocks will be major outperformers going forward. We also believe that the new generation media companies which are high quality content providers or production houses are likely to do exceedingly well going forward.

Q. Do u plan to continue to be overweight on ICE stocks in the future?
SS: We plan to have a reasonable exposure to ICE stocks and we still feel that in terms of earnings growth visibility these stocks are extremely well positioned. Concerns on stocks in the ICE sector are more to do with valuation rather than their growth prospects as such. We still believe that most of the stock in the software sector have excellent growth prospects and continue to hold on to stocks where we are comfortable with the valuations and their ability to grow despite the impact of a slowdown in the US economy. With the boom in telecom investment in the country companies in this sector are also likely to continue to show good growth going forward. As such we are looking to have a 30-40% exposure to the ICE sector in the medium term given the current valuations and future growth prospect of the companies in these sectors.