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Missing the Party?

UTI Balanced seems to have lost its touch. Three successive years of underperformance and now a manager change hint that all is not well for this second-largest balanced fund

The only positive that we see here is that the fund offers the least volatile portfolio. But volatility alone can't convince investors pledge money to this fund. In a booming market, UTI Balanced performance looks uninspiring.

Till 2002, the fund was doing extremely well with its ultra-conservative approach. Low equity exposure led by quality large-cap stocks meant that peace of mind was guaranteed here. And since the time was favourable for the bond market, a debt-oriented portfolio was enough to generate double-digit returns. The year 2002 changed everything.

Diminishing returns from the debt instruments forced the fund allocate more money to equities - the share increased from an average 32.33 per cent in 2001 to 61.21 per cent of the portfolio in 2002. High equity allocation led by large-cap stocks helped the fund deliver top-quartile performance that year. The fund changed tack once again to cash in on the mid-cap rally that began in 2003 - the fund transformed itself into a mid- and small-cap admirer. In 2000, the fund's equity portfolio had an average 26 per cent exposure to mid- and small-caps together, which jumped substantially to an average 63.54 per cent in 2005. The fund has largely maintained a 60:30 equity-debt ratio during this period. However, this has not worked well with the fund underperforming for the third straight year in 2005. More than equities, it's the debt portfolio that seems to have dragged the fund's performance down. The fund has taken some big interest rate calls which has not helped its cause in last three years. Today, high-quality corporate bonds and commercial papers form the core of the debt portfolio.

In the past, the fund has proved that it can handle tough situations better than others. For instance in 2000, when the markets were bearish, this fund delivered a 26 per cent return against the category average return of negative 13 per cent through timing the equity rally perfectly. It managed the technology downfall of 2000-01 quite well by shifting into debt. However, that's past. A relatively concentrated equity portfolio with allocation to individual stocks crossing 6 per cent mark consistently during the last three years and now a manager change means investors should pay close attention to the fund.