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Equity Funds Hold on Despite Negatives

The markets emerged largely unscathed in May despite darts of negatives hitting the bull's eye. The BSE Sensex, ended the month with a net gain of 112 points or 3.2%, taking the equity funds along.

The markets emerged largely unscathed in May despite darts of negatives hitting the bull's eye. A series of uncharacteristic events notwithstanding, the markets turned resilient and remained in positive territory during the month. In a decision that would change the complexion of the stock market, SEBI decided to ban all deferral products from July 2. Among other key decisions, the regulator is set to introduce options with an eye to widen the range of hedging products while adding more scrips to rolling settlement.

The markets were also jolted by the MSCI recast last month though it failed to have a lasting impact. India's weightage in the MSCI emerging market index was cut to 3.9% from 6.9% as the new adjustment is based on free-float – the number of shares available to overseas investors. But for the hike in FII investment limit to 49 per cent, the weighatge could have dropped further.

However, even as the bellwether survived the ban on badla and the MSCI recast, it finally buckled under FITCH downgrade. The revision of India's sovereign rating outlook to negative from stable saw the Sensex plunge by whopping 184 points in the last three trading sessions but it still ended the month with a net gain of 112 points or 3.2%. While the Sensex was in positive territory in May, it is still in red with a loss of 8.56% on a year to date basis.

That the market survived the tremors is largely attributed to FIIs' unflinching faith in Indian equities, which poured another Rs 1,000 crore during the month. On the other hand, domestic funds continue to be net sellers.

What has been the funds' survival strategy in the current bout of volatility?
Even as high levels of concentration in select sectors in 2000 saw funds take a severe beating, 2001 has ushered in healthy rationalisation in several portfolios. No surprises here as weightage to technology counters witnessed a sharp reduction – partly-driven by a falling market and partly by a conscious restructuring. For instance, one of the top diversified losers of last year, Magnum Multiplier Plus, has drastically slashed its allocation to this volatile sector from 72% to 24%. Ditto for Magnum Equity, whose tech holdings came down from 74% to 26%.

However, even as this rationalisation is in the right direction, it just may not indicate a long-term portfolio strategy. "The emphasis on diversification has increased further now but the change in outlook for technology is not permanent," says Jeremy Beswick, CEO and President, Birla Sunlife AMC. ICE stocks currently account for 14% of the portfolio in its flagship diversified equity fund, Birla Advantage, down from the March 2000 high of 76%. Adds Dileep Madgavkar, Chief Investment Officer, Prudential ICICI AMC, "We have maintained near neutral weight on technology sector and we would review our current stand at an appropriate time." Prudential ICCI Growth has pruned allocation to the volatile sector to 18% from a high of 51% in March 2000.

Diversified Funds
This category of 54 managed funds posted an average gain of 4.79 per cent to out perform the Sensex, which yielded 3.20% over the same period.

Even as many a portfolios were diversified, the gainers have been ones that still hold a substantial exposure to technology stocks. ING Growth Portfolio is a case in point. Despite being hammered to sub par levels in 2000, the fund has parked its Rs 54 crore corpus in just six software stocks. While the fund gained an impressive 10.06% with the software surge last month, it is quoting at Rs 7.55 or a loss of –12.70% since launch.

Taurus Discovery Stock, a primary market specific fund, has stakes in small cap stocks such as Akshay Software and Associated Infotech. With its other large holding of Jai Prakash Industries exiting from the MSCI Index, the fund suffered a loss of 0.87%. Taurus Starshare, with a fifth of its corpus apportioned to Jai Prakash Industries and Jagsonpal Pharma joined the laggards with a meagre gain of 0.82%.

Leaders and Laggards in this category

Tax Planning Schemes
While tax-planning schemes offer a rebate under Section 88, they carry a lock-in of 3 years. However, their small size coupled with the lock-in aids in posting a superior performance. This category of 18 funds posted an average gain of 6.08% last month.

Libra Taxshield topped the category with a gain of 13.84%, with is top holdings in media and petroleum counters witnessing a spurt. Magnum Tax gain followed at 13.55%, thanks to a 42% allocation to tech stocks.

Leaders and Laggards in this category

Technology Funds
The spurt in technology counters last month gave a much-needed relief to 12 technology funds, which logged an average gain of 8.13%. The gain notwithstanding, the new generation funds launched last year are still quoting way below par. Chola Freedom Technology, with a 59% cash position, lost out with a gain of only 3.18%. Well, the dictum, "Cash is King" does not always work!

Leaders and Laggards in this category

Pharma Funds
The three-member family of pharma funds posted an average return of 6.03% last month though the trio are still below par. Even as some counters like Dr Reddy's witnessed stock specific buying, many stocks also gained on the hopes of DPCO dilution.

FMCG Funds
Even as the monsoon arrived well in time and in full force, it does not seem to have raised hopes for FMCG firms. The three-fund category of FMCG funds is the lone category in the red with a loss of 0.34%. KP FMCG is the only fund, which rules above par.

Leaders and Laggards in this category

Specialty Funds
This Value Research Category of 13 heterogeneous funds posted an average gain of 5.05% last month. Alliance Basic Industries, with its focus on economic and restructuring plays, gained an impressive 10.31%. Yet, the fund is still below par at Rs 8.88. JM Basic, the fund dedicated to petrochemical majors, surged on the back of a Reliance-heavy portfolio to log a gain of 10.07%.

Leaders and Laggards in this category

Balanced Funds
Wit both equity and debt markets on an upswing, the 36 funds in the balanced category posted an average gain of 1.73 per cent. Continuing with its aggressive equity exposure, Magnum Balanced topped the charts with a whopping return of 10.31% last month.

Leaders and Laggards in this category