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The only fund focused on media and entertainment companies has done very well in its brief history. But investors should not allow it to take a lead role.

This is the only fund that focuses upon the media and entertainment sector. Since its launch in September 2004, it has performed reasonably well and its trailing one-year returns of 69.37 per cent look quite impressive. After starting with a corpus of over Rs 83 crore, the asset size steadily declined to just about Rs 20 crore by mid 2005. However, since then it has grown a bit and at present the fund manages just over Rs 45 crore.

Much of the fund's performance in its short history can be attributed to the second quarter of 2005, when it raced to deliver returns in excess of 26 per cent. This was the time when Adlabs Films looked unstoppable. In fact, three stocks have been the most valuable performers for the fund within its limited universe - Adlabs Films (which has grown four-fold), Deccan Chronicle Holdings and Television Eighteen India.

The fund started with a heavy bias for small-cap stocks (which used to account for 80-90 per cent of the portfolio). Over the period of time, a lot of weight has been shifted from small-caps to mid-cap stocks which now command close to half of the equity assets.

But this has been quite typical of this sector. If we look within the domain of the listed companies, there has actually been a dearth of giants. Among the companies classified in the media and entertainment industry as per our classifications, there is just one large-cap company - Zee Telefilms, a few mid-caps and after that comes a long list of small-cap stocks.

It's not surprising that the fund has found just about 19-20 stocks investment worthy since its inception. Even the cash allocation has remained quite high. Since October 2004, it has averaged 21.52 per cent despite the fact that the asset size has remained quite small. On the hindsight, perhaps the fund had been launched ahead of its time.

However, we are witnessing hectic activity in the media space. More and more media and entertainment companies are going public. Since the start of 2006, there have been at least four IPOs in this sector, including PVR, Entertainment Network, Jagran Prakashan and Inox Leisure. Interestingly, out of these, Reliance Media and Entertainment Fund has invested only in Inox Leisure.

Some other developments in the recent past also bode well for the sector. Take for example, the second phase of FM radio policy where the government put forth a revenue sharing scheme to operate stations across multiple cities in the country, apart from allowing for 20 per cent FDI in the FM space.

The increasing ad spend of India Inc, prime source of revenue for the media sector, is also an encouraging sign. As per the estimates of AdEx India (a division of TAM Media Research), total advertising revenue in 2005 across various mediums was Rs 13,200 crore, which was a substantial 14.1 per cent higher than the estimates for 2004. Though it's still early for the fund, but it looks poised to exploit its early advantage, as and when the sector shifts into overdrive.