The fund has delivered exceptional returns but high exposure to small caps makes it perilous
01-Sep-2006 •Value Research
Rewarding, But Risky
This small-cap dominated sector fund is capable of delivering exceptional returns but will surely test your patience every now and then. More than half of the portfolio allocated to smaller companies means the fund will be highly volatile - something that's well reflected in the fund's standard deviation, the second highest in the category. Investors need to stay put here for a longer period to get the best out of this fund.
Magnum IT hit the headlines last year recording a trailblazing performance under the leadership of erstwhile fund manager Sandip Sabharwal. After an eight-month stint, he left the fund house in November last year and since then the fund has seen three manager changes.
Against the superlative performance in 2005, the fund underperformed in the first quarter of 2006. During the recent crash as well, the fund was among the worst sufferers. It would be interesting to see how the new manager, Nimesh Chandan, manages volatility ahead with a portfolio dominated by small-cap stocks. To start with, he has improved the diversity of the portfolio and cut exposure to individual stocks. Before 2005, the fund's performance was not very impressive. It failed to beat the category average in each of the calendar years from 2001 to 2004. But things turned-around in 2005 as the fund's portfolio went for a complete makeover. Large-cap stocks, which used to form the core of the fund, made way for small-caps. Currently, 46 per cent of the fund's assets are invested in small-cap stocks.
Though this strategy resulted into higher volatility, it worked well for the fund. For the first time, Magnum IT earned the top slot by delivering 65.40 per cent return in 2005, much more than the 54.20 per cent gain of the second-best fund in the category.
The new manager has taken a few good steps but he would be tested by the prevailing uncertainty in the stock markets. For investors, patience is the key here because a portfolio dominated by smaller companies will continue to be highly volatile.