A relatively conservative asset allocation has made this fund a laggard in the recent times. All through the equity rally of the past three years, the fund's allocation to stocks has seldom gone beyond 61 per cent. In the recent months, it has turned even more conservative by reducing equity exposure to 55 per cent. This reflects that the fund actively re-balances portfolio to move assets in safer debt instruments with the rise of stock markets. Therefore, this is definitely not the fund for those looking for flamboyant returns.
The fund has failed to beat an average peer in each of the last three calendar years. Year 2005 was particularly harsh when the fund landed in the bottom quartile. And a recent fund manager change makes things more uncertain.
But a positive aspect is the fund's lower volatility, which gets reflected in its low standard deviation. Moreover, the fund has also done well to restrict losses in the recent market decline. In the three-month period ended August 6, the fund is down 11.7 per cent, less than the category's 13.07 per cent. In the past as well, 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's average negative return of 13 per cent through timing the equity rally perfectly. It managed the technology downfall of 2000-01 quite well by shifting into debt.
Till 2002, things were favourable for the fund as the debt markets were doing well to generate handsome returns. However, there have been dramatic changes after that, forcing the fund to be more aggressive. Since mid 2003, the allocation to mid- and small-caps has always remained more than 50 per cent of the equity allocation. The typical characteristic of this fund is that while the overall equity allocation is kept under check, within equities, the fund has been investing aggressively in mid- and small-caps. But despite sizing up allocation to mid- and small-cap stocks, the fund has not been able to keep pace with its peers.
On the debt part, some big interest rate calls seem to have played a role in the fund's under performance in recent years. As far as the credit quality is concerned, high-rated corporate bonds form the core of the portfolio.
To sum it up, the fund has found the going tough in the last few years. Investors will have to keep a close watch and gauge how the new manager takes things forward.
This article was originally published on September 19, 2006.
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