GETTING DEEPER INTO MUTUAL FUNDS

It is no coincidence that as equity indices are touching their lifetime high, the asset under management (AUM) of the mutual fund industry is also witnessing a similar trend. At the end of August 2014, the total AUM of the mutual funds industry grew by 0.6 per cent on a monthly basis to a lifetime high of Rs 10.12 lakh crore. The growth in AUM was aided by inflows in the equity funds, which accounts for roughly a quarter of the total AUM of the mutual fund industry. According to numbers released by the Association of Mutual Funds in India, the AUM of the country’s 45 fund houses increased from Rs 10,06,452 crore in July to Rs 10,12,824 crore last month (August 2014) and equity funds witnessed an inflow of Rs 5,217 crore.

The equity mutual fund assets’ soared 6.01 per cent to Rs 2.67 trillion in August, steered by both inflows and mark-to-market (MTM) gains. With the rally in equities stoking interest, the category clocked inflows for the fourth straight month at Rs 53.64 billion, says a report by CRISIL, a global analytical company providing ratings, research, and risk and policy advisory services. It’s lesser than Rs 108.45 billion seen in July, but consolidated inflows since the beginning of 2014 now stand at Rs 242.98 billion.

Similarly, the equity rally also helped balanced funds (hybrids that invest mostly in equity and a smaller portion in debt) crank up AUM for the fourth straight month. Assets rose 6.64 per cent, or by Rs 10.76 billion to Rs 172.93 billion on the back of inflows of Rs 4.48 billion – the highest since January 2008 – and MTM gains.

Such gains are on the back of better performance by the mid-cap and small-cap segment of the equity market. If we analyse the performance of the equity diversified funds that have been in existence for more than three years, it is the mid and small-cap dedicated funds that have outperformed their larger counter part. The superb short-term (last one year) performance of mid and small-cap segment helped it to outperform the large-cap dedicated funds.

In the last three years, the large-cap focused funds have generated average return of 19.53 per cent while the mid-cap and small-cap dedicated funds have given average return of 22.33 per cent and 27.63 per cent respectively. The recent (last one year) outperformance of the small and mid-cap funds helped to beat the long-term performance of large-cap funds. In the last one year the small and mid-cap dedicated funds have generated average return of 115 per cent and 81 per cent respectively compared to 49 per cent given by the large-cap funds in the same period.

We believe that as the macro-economy situations improve and the corporate environment gets better, mid-cap and small-cap companies will be the bigger beneficiaries. The rally in the small-cap and mid-cap started with large valuation gap between large-caps and mid and small-caps, and though it has narrowed down, there still exists a gap. Moreover, going forward the earnings growth curve will be much steeper for the mid-cap and small-cap companies, giving more room for appreciation for these companies.

Hence these funds are likely to continue with their outperformance and one can expect similar annualised returns over the next three to four years. This is the reason, this time out of the seven best mutual fund schemes we are recommending, five are from the mid-cap section and rest two are from the small-cap section. Regardless, in the last one year we have witnessed stocks from small-cap and mid-cap have moved up non-stop ahead of their earnings. Therefore a correction cannot be ruled out and that would be healthy too. Therefore, we advise our readers to invest in a staggered manner and to take the Systematic Investment Plan (SIP) route.

In the following two pages we are also presenting interviews of two industry stalwarts to guide you more on what to expect from and how to invest in the mutual funds.

“WE ARE ON A STEADY UPWARD PATH OF GROWTH”

A perspective by Nimesh Shah, MD & CEO, ICICI Prudential AMC

At the end of August 2014, the AUM of the country’s 45 fund houses touched a lifetime high of Rs 10.12 lakh crore and most of the inflows came to the equity schemes. How do you see it going forward?

While the FIIs have been the biggest investors in the last five years, retail investors have recently started increasing their allocation to equities due to poorer performance of other asset classes like real estate and gold. If you look at the Indian household’s balance-sheet, we still think that there is too much allocation to physical assets versus financial assets. As we see the performance of financial assets improving versus physical assets, we believe more investments could move towards long-term debt and equity. We believe equities have the potential to deliver moderate returns and fixed incomes have the potential to generate attractive returns over the next 3-5 years.

Domestic mutual funds remained net buyers in equity markets for the fourth consecutive month. What has led to such enthusiasm?

Our long-term view on India being one of the biggest structural opportunities in the world remains intact. We are on a steady upward path of growth. The last year’s base impact was quite bad and consequently there is a possibility of good numbers coming out in the following months on inflation, industrial production and various other fronts. This will further add to the optimism in India. We advocate that the market rally has more legs to go because the factors that characterise a market top - like industrial production growth in double digits, much lower interest rates and inflation - are still two to three years away from this point.  We expect to see reasonable returns in the equity market. As long as the Indian macro outlook looks reasonably positive, we think we should remain invested.

In the last few months many NFOs have been launched. What should an investor keep in mind while selecting these NFOs?

While investing in NFOs, it is of the utmost importance to look at the pedigree of the fund house, their investment philosophy and track record of other schemes. Look also at the experience and background of the fund management team that would manage the scheme. Evaluation of the NFO in terms of its investment mandate is essential too for investors to understand whether the scheme aligns with their risk profile. In short, do not simply avoid an NFO because it lacks track record; rather scrutinise it on the aforementioned metrics in order to make the right investment. It is also important to look at the theme on which the NFO is being launched.

What are the regulatory changes or initiatives that should be taken to increase retail participation in mutual funds?

Globally much of the growth in the MF industry has come because households have tended to invest a significant portion of their retirement savings in mutual funds. Growth does not come by push; ultimately, it is pull. The MF industry in the western world took off by initiating a strong pull strategy - bringing in money from pension funds as well as offering tax advantage to MF investors.  The Indian mutual fund industry is at a nascent stage and while foreign pension funds are investing in India, we are yet to see key reforms on the domestic pension side.

What is your advice to retail investors?

With merely 2.3 per cent of the Indian household savings allocated towards equities, retail investors have been under-invested towards financial assets and over-invested in physical assets like gold and real estate. This keeps the domestic investors bereft of the structural opportunity that India offers. We believe investors should incline their portfolios towards financial assets in order to create wealth over the longer term. It may be a prudent strategy to add flavour of funds in the balanced or dynamic category in a portfolio which seeks to capture the upside by increasing allocation to equity when the markets are declining, and protects downside by reducing exposure to equities when the markets are rising. Also, given that India’s CAD has corrected and inflation numbers have come down along with attractive valuations and fear in the market, long-duration fixed income is the most suitable asset class to invest in at this point of time.

“INDIAN COMPANIES HAVE THE ABILITY TO COMPETE ON THE GLOBAL STAGE”

In this interview with DSIJ, David Pezarkar, Chief Investment Officer – Equity, BOI AXA Investment Managers, elaborates about the investment climate as of now and what retail investors should do to derive maximum benefit.

At the end of August 2014, the AUM of the country’s 45 fund houses touched a lifetime high of Rs 10.12 lakh crore with most of the inflows coming into the equity schemes? How do you see it going forward?

Retail investors have increased their allocation to equities in the past few months. However, as a percentage of their total investible assets, the proportion occupied by equities is quite low. We expect that the business environment will improve steadily as government initiatives, combined with resurgence in consumer demand, will boost corporate sentiment. We have seen large areas of uncertainty in terms of the court pronouncements on coal mines allocation issues, and expect no more incremental negative news on this front. An improved regulatory situation and easier rules should incentivize corporate investments. All this should lead to an improvement in corporate profit trajectory, which would then be reflected in equity market performance. Investor flows to a large extent would be guided by market performance, and should therefore remain buoyant.

Domestic mutual funds remained net buyers in equity markets for the fourth consecutive month. What has led to such enthusiasm?

Incremental flows into equity funds have remained high, and the managements of most companies have expressed an upbeat outlook over the next few years. Equity investments are typically made with a minimum three-year horizon, and most fund managers would want to utilise bouts of volatility to increase positions in favoured stocks and sectors. Although the equity markets have risen significantly over the past few months and a phase of consolidation is possible, we do not expect a large correction.

This is because the global liquidity conditions remain benign, even as the US Federal Reserve is tightening its monetary stance and the European and Japanese central banks continue to ease monetary conditions. Commodity prices have eased off, which will benefit India’s external situation. Therefore from a top-down view, the overall scenario for investments in equity has improved, and is likely to remain so for the next few years. From a portfolio perspective, we attempt to translate this top-down view into a set of companies and sectors that should benefit the most from the improved situation, provided they meet our valuation and management capability criteria.

In the last few months a lot of NFOs have been launched. What should an investor keep in mind while selecting these NFOs?

Investors should evaluate whether an NFO offers a product which is materially different from an existing product available in the fund universe. It could be a better idea to invest in an existing fund with similar investment objectives and which has had a proven track record rather than go in for a new fund. Selecting a particular fund is more of an individual-oriented decision, and the allocation should be based upon her existing exposure to equity and fixed income products, liquidity preference, risk tolerance, source and variability of the primary income source, and a host of such factors. After having looked at all these factors, if the investor decides to invest in a particular offering, he or she should be aware of the investment style, orientation and time horizon that the fund manager has in mind. An analysis of the performance of existing funds managed by the same manager could also be useful.

What is your advice to retail investors?

Retail investors looking to increase exposure to equities should follow a disciplined approach and use market volatility to their benefit. Indian companies have developed the ability to compete on the global stage, and a few years of stagnation and difficult business conditions have improved their competitive abilities. The Indian regulators’ approach to business has changed for the better, and the environment for entrepreneurs to create wealth has never been as good. However, market sentiment changes rapidly and these mood swings can be very wild. Investors need to realise that most markets would move from extremes to normality over time, and should use any such periods of uncertainty to increase allocation to equities.

Performance Review of 2012, Rs 10 lakh MF Portfolio Recommendation

The proof of the pudding is in the eating and our 2012 recommendation of mutual fund (MF) portfolio of Rs 10 lakh clearly reflects our ability to spot the right funds that will create wealth for you. The MF scheme recommended by us in 2012 (last year we did not recommend any scheme) has yielded a superlative return as compared to the broader market. Our recommendation of Rs 10 lakh portfolio has grown to more than Rs 15 lakh in the last two years, generating return of more than 50 per cent, whereas the Sensex in the same period has given return of a mere 41 per cent. The important part to note is that all the funds recommended by us have beaten the Sensex returns. Moreover, our portfolio’s return is also a tad better than the average return given by our recommended funds. The best return is given by Mirae Asset Opportunities Fund that gave returns of 62 per cent followed by Reliance Equity Opportunity which provided returns of 61 per cent.

Methodology

We start the process by taking the entire universe of equity diversified funds, which excludes the sector funds. Following that, we apply different filters. The first filter that we applied was the duration of the existence of funds. We consider only those funds that have been in existence for more than three years and whose corpus size is more than Rs 100 crore. After this we measure the performance of the funds for the last three years. We considered a trailing three-year time frame because the period gives us the opportunity to judge the performance of a fund across the cycle. Analysing performance in these time periods gives a clear idea about the resilience of the fund.

Next, we ranked schemes based on their performance in four time periods of one month, six months, one year and three years. Then the ranks were given weightage, with 50 per cent weightage given to the three-year rank; 30 per cent to one-year rank; and 10 per cent weightage each to the six-month rank and one-month rank. The logic for this weightage was to give more importance to those funds that have consistently performed well in the long-term. After this, we examined few ratios such as the Sharpe ratio, expense ratio and orientation of the fund i.e. where they have invested their large chunk of funds. Then we considered certain softer issues such as performance of funds where the same fund managers are managing the funds to know if it is an aberration.

Axis Mid-Cap Fund

AUM Rs. 342 CRORE.................................................................................AS ON JUNE 30, 2014

DIVIDEND (NAV) Rs. 20.00 .....................................................................AS ON SEPT 26, 2014

Usually it is said that those with an early mover advantage get an upper hand over the competition. However, there are some who can actually catch up with the others even if they arrive late on the scene. And Axis Mid-cap Fund is one example. This mid-cap fund has stolen the show in its category although it has had a delayed entry. Launched in the range-bound markets of early 2011, it is among the top ten funds in its category on a three-year ranking. Its consistent and strong performance is clearly visible from the fact that on a three-year basis it has outperformed the category by 487 basis points and outperformed the mid-cap index by more than 1,500 basis points. Just to put the figures in perspective, a SIP of Rs 100 in the past three years (Rs 36,000) would have appreciated to Rs 64,571.

Regarding this performance, many may feel that the fund is only in its early days and this makes it difficult to gauge its ability to protect itself against any downside risk. However, we would like to point out that since inception it has witnessed a difficult market scenario including declining earnings and policy paralysis. Hence delivering returns after investing only in mid-cap companies is a commendable job.

As for its stock selection strategy, it is all about finding emerging blue chips - the mid-cap stocks that are likely to transform into large-caps from its investment universe of about 200 companies. The fund manager does not mind paying higher valuations for companies that have this quality of scalability. Apart from return on equity and return on capital, this fund hunts for companies that can grow at exceptional rates of 20-25 per cent CAGR.

The market-cap allocations since launch show that the fund has focused most of its energies on mid-cap stocks, making up for 65-70 per cent of the portfolio. Small-caps too have been sizeable, at 28-35 per cent in the last two years, with positions in large-cap stocks being minuscule at sub-10 per cent levels. The fund manager firmly believes that in a high growth cycle, companies moving from mid-cap to large-cap can create enough value for shareholders and that is what we look for while identifying mid-cap companies. As investing in mid-caps has its unique risks, the fund tries to focus more on larger mid-cap companies. The fund is being managed by Pankaj Murarka since January 2011.

As regards its current portfolio, the fund is 95.99 per cent invested in equities and the rest in debt. The top five funds contribute around 58/.76 per cent. Here financials make up for 20.49 per cent followed by services (13.42 per cent), engineering (8.91 per cent), healthcare (8.36 per cent) and construction 7.58 per cent).

We are also buoyant about the good performance of the services and engineering sectors. On a micro basis, the companies selected include CMC, ING Vysya, Federal Bank, DB Corp and Mphasis. While the first three are growing steadily the other two have witnessed strong growth. We are also positive on such inclusions as VST Tillers, BASF India and Sanofi India. As for the other parameters, its beta is 1.02, the Sharpe ratio is at 0.97 and alpha is around 9.80.

Therefore, given the fact that all the parameters are positive, we recommend our readers to buy Axis Mid-Cap Fund.

DSP BlackRock Micro-Cap Fund

AUM Rs. 522 CRORE..............................................AS ON JUNE 30, 2014

DIVIDEND (NAV) Rs. 18.74...................................AS ON SEPT 26, 2014

Equities as an asset class have created huge wealth for their investors’ year-till-date (YTD). Moreover, mid-cap, small-cap and micro-cap have remained the flavour of the season. The BSE Sensex, on an YTD basis, has given a total return of 25 per cent against 39 per cent and 59 per cent by BSE small-cap and mid-cap indices respectively in the same period. DSP BlackRock Micro-Cap Fund, which invests 65 per cent of its corpus in micro-cap stocks (companies that are ranked beyond 300 in the market-cap ranking of individual companies) and rest 35 per cent is moved into small, medium and large-caps is one fund that has even outperformed the huge return generated by its category.

In the last one year the fund has yielded return of 120 per cent against the category return of 90 per cent. In the longer period too the fund has outperformed its category. Over the past five years the fund has given return of 25.14 per cent compared to 18.55 per cent given by its category. As such, it has been a consistent performer over the years both in good as well as not so good times and has constantly beaten its benchmark expect for the year 2009 when it generated return of 115 per cent while the benchmark return was 127 per cent. Besides, when the overall equity market was not doing well, the fund has been able to arrest its fall. For example in 2011, when the benchmark index fell by 42 per cent, the fund generated negative return of 27 per cent.

The fund has been able to generate such returns owing to its stock selection strategy which is more of a bottom-up approach and based on a ‘buy and hold’ strategy. Vinit Sambre, who manages this fund, explains that “very little views are taken on top-down approach and a large part is played by the bottom-up approach.” “We give more importance to the promoter and management of the company, cash generation, RoCEs and track record of the company for the last 5-10 years,” he further explains and adds that “even if a stock is hyper-valued and the business case remains strong, I am not going to cut the position because if the business case remains strong the PE tends to be re-rated and one has to play the entire cycle properly.” Th is has helped the fund generate better returns over the period.

The fund being a micro-cap is focused and carries an inherent risk of liquidity. Nonetheless, the fund manager uses the cash position and holdings in large-cap and mid-cap to manage liquidity. Moreover, the fund invests in only those stocks that have good earning visibility and the capability of generating returns that will take care of any impact cost.

Looking at the nature of the fund, stock-picking strategy and the track record of the fund manger, we recommend aggressive investors to take exposure in the counter.

Franklin India Smaller Companies Fund

AUM Rs. 588 CRORE.....................................................AS ON JUNE 30, 2014

DIVIDEND (NAV) Rs. 22.17..............................................AS ON SEPT 26, 2014

The performance of Franklin India Smaller Companies Fund has seen a remarkable change after the scheme has been converted to open end from January 2011. Since the launch of the fund in 2006, the fund underperformed its benchmark returns in three years out of five years when it remained close ended. But after that there was no looking back for the fund and since the start of 2011 it has outperformed the category as well as benchmark returns consistently, whether in a bull or bear market scenario. For example, in 2011 when the broader market indices saw a cut of around 31 per cent and frontline indices dropped by 25 per cent, the fund managed to restrain the losses better than its category. In the following two years the fund outperformed both the category as well as frontline indices. In the last three years the fund has generated return of 34.72 per cent compared to 24.77 per cent return generated by the category. It has been able to capture the bull run of the last one year and has generated return of 97.67 per cent.

What has really helped the fund to outperform is its stock selection strategy, which uses a bottom-up approach of stock picking and is growth-oriented. The fund’s stock selection focuses on finding those companies that generate positive cash flows across any business cycle, have high return ratios, comfortable leverage, and good growth for the next one or two decades. This is the reason it has been able to generate better returns while keeping its portfolio risk lower than the median risk associated with its category. The fund was earlier managed by R Janakiraman since 2014 but has been taken over by Roshi Joshi from March 2008.

It is a mid-cap fund that currently (as per the August 2014 portfolio holding) has 42.96 per cent of its net assets invested in such stocks, which is slightly lower than the benchmark and category funds that invest 73 per cent and 51 per cent respectively in mid-cap. And over 91.09 per cent of its assets are invested in 62 equity stocks wherein the top ten holdings contribute almost 27.22 per cent of its net assets. This gives the zest of diversification to the fund’s portfolio, though the fund has taken a concentrated sectoral call wherein the top three sectors contribute over 45.27 per cent of the net assets. The fund defines mid-cap and small-cap companies as those that have a market capitalisation below that of the 100th stock in the S&P CNX 500 Index. The fund’s stock selection seemed to have worked for their investors and will continue to generate better returns. Hence, investors with moderate risk appetite can make it a part of their portfolio.

HDFC Mid-Cap Opportunities Fund

AUM Rs. 4496 CRORE..........................................................AS ON JUNE 30, 2014

DIVIDEND (NAV) Rs. 23.78.................................................AS ON SEPT 26, 2014

When we are preparing a MF portfolio we have to add some amount of zing to generate additional returns. However we also need to look at the inherent risk factors while assessing the same. But what can be better than HDFC Mid-Cap Opportunities Fund which has created an alpha for its investors and has got the right spark to generate good returns going ahead? A fund which had outperformed its benchmark index by a staggering 2,767 basis points in the last one year deserves a big round of applause. This is exactly what has happened with HDFC Mid-Cap Opportunities Fund. Its benchmark CNX mid-cap has generated a return of 63.62 per cent whereas the fund has generated a return of 91.29 per cent for its holders.

Not only this, if you had invested Rs 1,000 per month for the past three years, the incremental value of Rs 36,000 would now be Rs 63,518. This shows the inherent strength of the fund to create value in long term in the mid-cap space. Managed by Chirag Setalvad since May 2007, the AUM of the fund has increased from Rs 1,680.41 crore in 2007 to Rs 4,496.30 crore as of June 30, 2014.

As regards the strategy of the fund, it works with the aim of generating long-term capital appreciation from a portfolio that largely constitutes of equity and equity-related securities of mid and small-cap companies. At present, the mid and small-cap companies comprise 88 per cent of the portfolio while the rest is invested in large-cap companies. The fund in the longer run as well as in the shorter term has been able to perform better. This can be validated by the fact that it has been able to beat its category returns in the span of three years, one year and also in the three-month period.

The fund has spread its holding across the mid and small-cap companies, forming 79.57 per cent of its portfolio. However, the concentration is a bit tilted towards the mid-cap companies which comprise 62.76 per cent of the total holdings whereas the small-cap constitutes 18.31 per cent. At present the scheme has a portfolio of 65 stocks. Around 95.65 per cent of the scheme is invested in equities and the rest is in debt.

About the change in portfolio, the company has reduced its exposure to small-cap companies. We feel it is a good strategy as mid-cap is comparatively expected to witness traction while small-cap may be witnessing profit booking. The fund manager has done a smart thing by already booking profit in the small-cap counters.

The investment of the fund is well-diversified. The top five sectors comprise more than 61.56 per cent of the portfolio and these include financials (19.12 per cent), healthcare (12.56 per cent), engineering (12.44 per cent), chemicals (10.07 per cent) and FMCG (7.37 per cent). The fund manager has been vigilant enough to shuffle the portfolio. Since the start of the year there has been a good focus on financial and engineering companies. This shows the experience of the fund manager and the capability to find the right opportunities for the sake of the investors.

The improved performance of the fund has not come at the cost of risk-taking. This statement can be substantiated by looking at the Sharpe ratio which stands at 0.97. The alpha of the fund stands at 8.45, which represents the excess return that the fund has generated at a given level of risk. The fund can be an ideal candidate to form a part of the mutual fund portfolio of risk-taking investors.

ICICI Prudential Value Discovery Fund

AUM Rs. 4114 CRORE......................................................AS ON JUNE 30, 2014

DIVIDEND (NAV) Rs. 30.77.............................................AS ON SEPT 26, 2014

Investors would be surprised to see ICICI Prudential Value Discovery Fund as a part of our MF portfolio, especially after recommending it as one of our ‘Fund of the Fortnight’ only a few issues ago. However, when we are recommending a portfolio of mutual funds, we cannot ignore ICICI Prudential Value Discovery Fund which is true to its name and has indeed discovered value for its investors in the long term. Just to substantiate our statement, the figures show that the value of Rs 1,000 invested per month for the last three years (which is Rs 36,000 cumulatively) today stands at Rs 66,110.50. Also, if we look at the AUM of the fund, it has grown to Rs 4,114 crore (as on June 30, 2014) since 2009, showing a CAGR of 49 per cent.

If we take a detailed look at the fund, which is managed by Mrinal Singh since February 2011, it works with the objective of investing in a well-diversified portfolio of value stocks (those having attractive valuations in relation to earnings or book value or current and/or future dividends). The fund follows the principles of value investing to buy stocks at discount to their intrinsic value. It also follows a rigorous process to identify fundamentally strong and well-managed companies which are out of the market’s favour. The fund follows a bottom-up strategy and yet it ensures diversification across sectors and has shown remarkable resilience in a lean market, handsomely leaping in a rising market.

Backed with the strategy of value investing, the fund has managed to create good wealth for investors and this is clearly visible from the fact that it has managed to outperform the category returns. Rather, the fund has been able to outperform its benchmark as well as its category of funds in the last one year as well as in the longer term. In a period of one year, three years and five years, the fund has outperformed its category returns by 147 basis points, 644 basis points and 420 basis points respectively.

What provides us solace here is the diversified portfolio it holds. Looking at the composition of its portfolio, the top five sectors constitute 58.02 per cent of its portfolio. These are financial (20.23 per cent), engineering (10.07per cent), automobile (9.88 per cent), services (9.54 per cent), and construction (8.30 per cent). This sectoral asset allocation clearly exhibits that the tilt is towards cyclical sectors, which have once again come into the limelight post-elections. We are more comfortable with is increased exposure to the automotive industry. Further, the reduced emphasis on energy also seems to be a good strategy.

The top five stocks that form part of its portfolio are ICICI Bank (7.67 per cent), Reliance Industries (3.17 per cent), PI Industries (2.95 per cent) Sadbhav Engineering (2.85 per cent) and Amara Raja Batteries (2.63 per cent). Out of the 61 companies that form part of its portfolio, mid-cap and small-cap companies constitute 65.47 per cent of the AUM, while the balance is held in exposure to large-cap stocks. We feel the outperformance of mid-cap companies is likely to continue in the next one year.

The improved performance of the fund has not come at the cost of risk-taking even on a conservative note as compared to its peers. This can be substantiated by looking at the Sharpe ratio which stands at 1.12. The alpha of the fund stands at 11.68, which represents the excess return that the fund has generated at a given level of risk. The fund could be an ideal candidate for inclusion in the mutual fund portfolios of both risk-taking as well as risk-averse investors.

Reliance Small-Cap Fund (RSCF)

AUM Rs. 566 CRORE.............................................AS ON JUNE 30, 2014

DIVIDEND (NAV) Rs. 19.71...................................AS ON SEPT 26, 2014

The small-cap companies continue with their outperformance over large-cap and mid-cap companies. We believe that with the revival of the economy small-caps will continue with their outperformance, although we may see some patches of underperformances. Therefore it makes sense to invest in small-cap funds now with a long-term horizon.

Reliance Small-Cap Fund (RSCF) is one such fund that invests in small-cap companies and has generated envious return in all time frames. Since the start of the year the fund has generated 84.63 per cent return compared to 60.34 per cent return delivered by the category. The outperformance increases as we expand our study period. Over the last three years RSCF has given annualised return of 35.18 per cent against 26.19 per cent return generated by its category. The scheme has always been ranked among the top 10 performers in its category. Moreover, the fund is going to generate better returns during the bull period as reflected in the fund’s beta which stands at 1.04. Therefore if the market moves up by one time the fund will move up by 1.04 times. What is worth noting is that such a performance of the fund has been achieved by not taking extra risk, as reflected in the Sharpe ratio of the fund that stood at 1.04. This ratio indicates the scheme’s returns over and above the risk taken by the fund. The alpha of the fund too stands at 12.78, which again indicates the above average return generated by the fund over the expected return.

The aggressive investment style followed by the fund manager helped it to outperform its category. The fund bets on companies in the small-cap segment, thus trying to explore the potential of high growth and under-valuations. The fund follows a blend style of investing that is a mix of value and growth by using a bottom-up approach. It also maintains a diversified equity portfolio and invests in cross-section of growth areas of the economy. At the end of August 31, 2014 the fund has a well-diversified portfolio of 53 stocks and no single stock has more than six per cent of weightage in the total assets while the top ten stocks constitute 34.19 per cent of the total assets. Atul Ltd. has the highest weightage of 5.65 per cent in the fund. Even in terms of sectors, the fund has a well-diversified portfolio and the top three sectors hold little more than 40 per cent of the total assets.

What is also helping the fund to perform is the lower churning of stocks. The primary focus of the fund is to ‘buy and hold’ and wait for the stocks to be re-rated or improve their performance. Therefore the turnover of the fund is 27 per cent. Nonetheless, the fund will not abstain from selling if a stock’s valuation looks stretched. The credit for such performance should go to fund manager Sunil Singhania who has been managing the fund since inception. The fund manager has a good track record of managing other funds too. Therefore, we advise medium to high-risk investors to invest in the fund through SIP.

UTI Mid-Cap Fund

AUM Rs. 964 CRORE..........................................AS ON JUNE 30, 2014

DIVIDEND (NAV) Rs.45.52................................AS ON SEPT 26, 2014

A rising tide lifts all boats and many will think the performance of UTI Mid-Cap fund has to do more with the rising equity market. Notwithstanding the bull market, there are many changes that have been done internally in the management of the fund that has helped it to outperform after two years of weak performance. The fund underperformed its benchmark in the rising market of 2010 and yielded a negative return of 23.92 per cent in the following year. The reason for such underperformance as explained by Anoop Bhaskar, Fund Manager, UTI Mid-Cap Fund who said, “We were running two mid-cap funds – UTI Master Value and UTI Mid-Cap and that was splitting the best investment ideas between them. Also the ability of a research team to feed ideas for two mid-cap funds limited the generation of any new ideas at the individual fund level. Moreover, we had made a few mistakes on stock selection, which took two-three quarters for us to exit and restructure our portfolio.” 

However, after the restructuring of the portfolio and a renewed focus on quality stocks not only helped the fund to recoup its underperformance but also helped to surpass the category performance overall. The fund performance also got a boost after the merger of these two mid-cap funds in March 2014.

As the name suggests, the fund is focused on the mid-cap sector and has invested 57.14 per cent in mid-cap stocks, 31.37 per cent in small-cap and the rest in large-cap at the end of August 2014. The fund uses more of a bottom-up approach for selecting the right stocks that form part of the portfolio. Talking about the stock selection strategy, Bhaskar says, “The mid-cap segment is more stock-specific rather than sector-based as is the case with large-caps. Hence, the focus is on stock selection rather than a top-down approach."

In terms of sectors the fund is overweight on automobile, healthcare and construction that together constitute 37.5 per cent of the total assets of the fund compared to 17.91 per cent weightage in the CNX Nifty. As Bhaskar explains, “Traditionally, in India, auto ancillaries, pharmaceutical, consumer goods and light engineering companies have been dominant in the industrial sector. This ensures a large investment universe of companies that have weathered business cycles, expansion, import threats, etc. This makes these companies natural candidates in any mid-cap portfolio.” The fund, going forward, will continue to generate better returns for its investors as quality mid-cap stocks will continue to yield better returns on the back of earnings’ rebound. Hence we advice our readers who can take moderate risk to make this a part of their portfolio.