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Riding the Curve

Markets saw a complete cycle in 2006- a bullish start followed by a crash and then a recovery. An analysis of how funds with contrasting investment styles performed during different phases

2006 was another year of festivities on the domestic bourses, when the stock markets yet again delivered over 40 per cent returns. But there were some noticeable differences this time around vis-à-vis the bull run of the previous three years.

Firstly, it was the turn of large-caps this time as the Sensex gained close to 47 per cent, much more than 31 per cent of BSE Mid Cap and 16 per cent of BSE Small Cap. Secondly, the actively managed funds found it extremely difficult to beat the markets. Just 30 out of 145 diversified equity funds were able to beat the returns of Sensex. That means only 21 per cent of the funds bettered the markets! This was not so in the preceding three years. In 2003, 60 out of 65 funds (or 92 per cent) beat the Sensex. For 2004 and 2005, these figures were 71 out of 75 (95 per cent) and 58 out of 100, respectively. Clearly, it is getting more and more difficult to outperform as the markets have moved into uncertain territory.

Thirdly, markets went through a complete cycle during 2006. There was a bullish phase to start with, followed by a market crash, and then there was a recovery. We analysed how funds behaved during different market cycles and derived some interesting insights.

The table alongside lists the best performing diversified equity funds of 2006. We have segregated their performance in three distinct phases of the market to see how they performed in each of them. Even though all the funds on this list figure in the top quartile of the category on the basis of complete year's performance, there were stark differences in the way they performed during market phases.

First classification of this list (Consistent Performers) comprises of those funds which delivered above average returns during the bullish as well as bearish phases alike. When the markets were on their way up, they capitalised upon it to generate handsome returns. And when the markets tanked, they were able to lose less than their peers. None of them have emerged absolutely on top of the returns charts in any of the phases, and have just managed to better the category averages on most occasions (notice their rankings in each of the phases). But it is their ability to do that consistently, even during the testing times, that has promoted them to the top quartile on an overall basis.

Isn't that what we always say - that you should look for funds that have the ability to perform well consistently across market phases? Little wonder that so many of them enjoy a high four-star rating.

Next are the Aggressive Movers. These funds generated sky-high returns when the markets were zooming, then tanked massively along with the Sensex, but were up at the top again when good times returned. Expect huge returns from them, but be ready to see them fall like a pack of cards during turbulence.

The third part of the list comprises of the other top performers, which did not display any specific trend. The most notable among these is Sundaram BNP Paribas Select Midcap - which saw it all during 2006 - an aggressive stance to start with, a defensive posture towards the end, and a bit of luck in between! The fund started the year 2006 very well. Real estate bets like Unitech benefited immensely. And when the markets fell subsequently, it was lucky to find itself in a sweet spot. The fund witnessed huge inflows during May last year, because of which, its cash position went up dramatically from 14 per cent to 34 per cent. As a result, the impact of the market fall was minimal and it lost much less than other funds. But since then, it has turned defensive and still holds 20 per cent of its assets in cash.


TOP PERFORMERS OF 2006
SchemeName  Rating  2006    BULL PHASE-I    BEAR PHASE    BULL PHASE-II  
    Ret (%)  Rank  Ret (%)  Rank  Ret (%)  Rank  Ret (%)  Rank
Category Average Returns    34.74    33.13    -32.58    50.48  
Consistent Performers                  
Reliance Regular Savings Equity Not Rated  55.95 10 36.14 57 -31.53 61 67.30 6
Magnum Equity 3 star  51.47 14 42.12 20 -30.31 34 52.93 67
Franklin India Prima Plus 4 star  49.36 20 35.13 62 -31.87 67 62.22 18
Pru ICICI Power 3 star  48.90 23 43.79 16 -31.99 71 52.26 70
Principal Large Cap Not Rated  48.13 26 39.01 36 -29.94 32 52.10 72
DSPML Top 100 Equity 4 star  46.60 32 36.65 52 -31.15 52 55.81 47
HDFC Index Sensex Plus 4 star  45.54 34 34.45 65 -29.33 25 53.19 65
Franklin India Bluechip 4 star  45.52 35 36.32 56 -30.78 43 54.23 52
HDFC Growth Fund 4 star  44.14 37 33.92 71 -31.67 63 57.51 41
Pru ICICI Power Inst I Not Rated  50.55 16 44.39 13 -31.89 69 53.10 66
Aggressive Gainers                  
UTI Infrastructure Not Rated  61.48 1 49.10 7 -34.07 112 64.27 12
Tata Infrastructure Not Rated  60.32 3 51.72 6 -34.82 123 62.12 19
Pru ICICI Infrastructure Not Rated  58.53 4 46.27 9 -35.03 125 66.82 7
Pru ICICI Dynamic 3 star  58.31 5 46.66 8 -33.97 109 63.49 15
Magnum Global 5 star  56.63 6 44.78 11 -33.98 110 63.88 13
Sundaram BNP Paribas CAPEX Opp.-D Not Rated  56.31 7 55.17 2 -35.93 139 57.23 43
Franklin India Opp Not Rated  56.09 9 44.09 15 -38.02 161 74.78 2
DSPML T.I.G.E.R. Not Rated  52.43 11 42.09 21 -33.88 105 62.24 17
HSBC India Opportunities Not Rated  51.71 13 39.49 33 -35.55 136 68.75 4
Reliance Equity Opportunities Not Rated  51.28 15 42.50 18 -33.89 106 60.59 24
Tata Select Equity 3 star  50.38 18 44.56 12 -34.36 117 58.49 35
Magnum Multiplier Plus 3 star  49.83 19 39.74 29 -32.90 87 59.80 29
UTI Master Plus '91 2 star  48.76 25 39.88 28 -33.60 100 60.16 25
DSPML Equity 4 star  47.09 29 39.21 34 -33.93 107 59.92 27
Magnum Midcap Not Rated  46.69 31 42.06 22 -37.76 158 65.89 8
Others                  
Sundaram BNP Paribas Select Midcap 5 star  60.77 2 55.67 1 -28.03 14 43.50 133
Sundaram BNP Paribas CAPEX Opp.-G Not Rated  56.15 8 54.10 5 -35.42 132 56.91 44
Reliance NRI Equity Not Rated  51.85 12 27.00 109 -25.87 6 61.30 21
Magnum Contra 5 star  50.48 17 46.27 10 -31.36 54 49.88 90
Sundaram BNP Paribas Select Focus 4 star  49.24 21 44.28 14 -30.34 36 48.50 107
DWS Alpha Equity 3 star  49.01 22 54.75 4 -36.98 153 52.79 68
Taurus Starshare 3 star  48.85 24 38.28 39 -39.56 164 78.10 1
Birla Sun Life Frontline Equity 4 star  47.70 27 29.58 95 -26.65 9 55.39 50
Pru ICICI Services Industries Not Rated  47.33 28 24.43 119 -32.06 73 74.27 3
Magnum COMMA Not Rated  46.85 30 54.89 3 -37.44 154 51.56 75
Reliance Vision 5 star  45.80 33 37.48 44 -33.51 98 59.50 31
Fidelity Equity Not Rated  44.14 36 32.91 79 -32.18 75 59.90 28
Bull Phase I: Jan 01-May 10, 2006
Bull Phase II: June 15-Dec 31, 2006