GEMGAZE

September 2016

Diversified mutual funds are those which spread their investments across various sectors or internally within themselves. This is basically done to avoid the risk associated with one specific sector. However from the diversified section you need to find the best one and it is easier said than done. It becomes puzzling when we have more than 100 diversified schemes to choose from and GEMGAZE offers a plausible solution for the same. All the five GEMs of the 2015 GEMGAZE have qualified yet again for the 2016 GEMGAZE.

HDFC Equity Fund Gem

2015 was a testing year for investors in HDFC Equity Fund given its poor showing versus other large cap Indian mutual funds. The fund has invested 99.51% in equities, 75% in large caps and 54.47% in the top three sectors, finance, auto, and energy. One-year return of the fund is 18.96% as against the category average of 19.22%. The 15,858 crore HDFC Equity’s prospects are not blemished by its recent underperformance. Manager Prashant Jain’s investments in public-sector banks such as SBI have hurt performance. The manager has long favoured public-sector banks in his portfolios as he believes that they will be major beneficiaries of India’s long-term structural growth. An unwavering focus on the long term and willingness to back conviction bets are integral to the approach. As a result, Jain will trade near-term pain for long-term gains. Research is central to this investment style, with Jain effortlessly combining top-down and bottom-up analysis (with more emphasis on the latter) to identify companies with robust business models, strong balance sheets, and competitive advantages. He pays heed to valuations while picking stocks, freely combining relative and absolute valuation methods. He typically invests in companies he believes are well-positioned for long-term growth. While constructing the portfolio, Jain is mindful of the benchmark index weightings, but is not benchmark-aligned. His willingness to be disciplined and adhere to his investment style, even when it is out of favour, is noteworthy. Admittedly, the process has its biases. The valuation consciousness coupled with aversion to speculative fare may cause the fund to lag peers in momentum-driven markets. Further, in a downturn, Jain’s policy of staying fully invested could lead to under performance versus peers who get their cash calls right. Yet, the process will hold long-term investors in good stead. 

Sundaram Select Midcap Fund Gem 

Sundaram Select Midcap Fund one of the marquee funds from the Sundaram Mutual Fund stable. The fund has an AUM of Rs. 3,960 crores and is being managed by the well-known fund manager, Mr. S. Krishna Kumar since 2012. Sundaram Select Midcap Fund is one of the consistently performing equity mutual funds in the mid cap category. The fund aims to achieve capital appreciation by investing in high growth mid-cap stocks. The fund defines 'midcap' as a stock whose market capitalization shall not exceed the market capitalization of the 50th stock (after sorting the securities in the descending order of market capitalization) listed with the NSE. As the risk and return grade of the fund is ‘Above Average’ it could be a good pick for those willing to take high risk in order to get higher return by investing in midcap stocks. The 58% assets of Sundaram Select Midcap are currently invested in five sectors - Financial, Automobiles, Textiles, Services, and Engineering. The 3, 5, and 10 year annualised returns of the fund is quite impressive at 30.78%, 18.92%, and 17.947% respectively. The fund has beaten the Benchmark S&P BSE Mid Cap Index with very good margin. The one-year return of the fund is 26.95% as against the category average of 21.31%. The expense ratio of the fund is 2.29% and the portfolio turnover ratio is 25%. True to its nature, the fund can be very volatile in the short term, reflecting the market conditions. It is not for the faint hearted. Apart from general market risk, security risk, the lack of liquidity at times, and higher volatility associated with mid caps stocks could affect the fund and its performance.

ICICI Prudential Dynamic Fund Gem

While it looks like market volatility will remain an issue for at least some more time, funds that contain downsides and handle it well are good bets. The 5,847 crore ICICI Prudential Dynamic Fund, an equity fund benchmarked against the Nifty index, fits the bill. By its mandate, the fund shuttles between asset classes based on market valuations. If valuations turn expensive, equity exposure is cut in favour of debt. Though the fund can invest across market capitalisations, it puts 70-75% (71.34% at present) of its portfolio into large-cap stocks. In its debt portfolio, the fund has usually invested in fixed deposits, other short-term debt instruments, or held cash. In rallying markets, while the fund does not put up chart-topping returns, it still does better than its benchmark and the category. The fund was an early mover into steadier picks in power and energy, and has also upped stake in automobiles. These sectors stand to benefit if recovery gets into full swing. ICICI Prudential Dynamic fund’s exposure to metals and capital goods sectors was hit last year. Some pain is still left due to it but recovery is expected. The fund invests 47.72% in the top three sectors. The expense ratio of the fund is 2.11% and the portfolio turnover ratio is 249%. The one-year return of the fund is 24.86% as against the category average of 21.30%. This is manager Sankaran Naren’s second stint in the fund after running it from September 2006 to February 2011. He returned to the helm in Feb 2012 following a hiatus of roughly a year and Atul Patel has joined him in April 2016. The change in guard notwithstanding, the investment strategy has remained unchanged, as has the fund’s ability to deliver a strong showing. Taking cash calls is integral to the approach. Naren deploys a rules-based approach using the historical price/book value of the market to determine fair value and in turn tweak cash allocations. Reading the macro-economic environment is a strength he uses to take sector bets, favouring those with attractive fundamentals and shifting away where he thinks valuations are stretched. The manager’s philosophy is to ensure the fund performs better than peers when markets fall, even if the strategy hurts performance in rising markets, thereby ensuring a robust performance over a market cycle. The fund’s superlative showing on the risk/return front under Naren bears out his success thus far. Of course, some aspects of the strategy need to be noted. In a sustained bull run, the model will point towards a higher allocation to cash. This in turn may lead the fund to underperform the competition, as evidenced by its lacklustre showing in the sustained bull run of 2014 when high cash allocation and counter-cyclical positioning hurt performance. As the stock-picking strategy focuses on uncovering attractively priced stocks, the risk of being caught in value traps needs to be highlighted. Yet the fund's cause is aided in no small measure by Naren's presence and his flair for making the strategy work. The fund can hold investors in good stead over market cycles.

DSP Blackrock Equity Fund Gem

DSP Blackrock Fund is a 2,487 crore fund that invests 71.39% in large caps and 47.3% in the top three sectors, finance, energy, and automobiles. The expense ratio is 2.31% and the portfolio turnover ratio is 89%. The one-year return of the fund is 23.94% as against the category average of 21.30%. Large and small/mid cap stocks are different beasts that can deliver widely divergent performances. Few managers are adept at investing in stocks across market segments but Apoorva Shah easily makes the cut. He forms views on stocks based on a company’s growth prospects, expected cash flow and other quantitative parameters; a qualitative overlay is also present. His approach combines an in-depth understanding of stocks with elements such as market sentiment, news flow, and momentum. He will tweak his portfolio in response to rising and falling prices with equal swiftness. Interestingly, the manager trades the large-cap portion of his portfolio far more rapidly than the small/mid-cap portion. This is in line with his belief that generally large caps trade closer to their fair valuations. Conversely, he believes that smaller-cap fare need more time to deliver, which in turn necessitates a longer investment horizon. The success of the investment process largely depends on Shah's execution capabilities. He uses his skills to good effect by running a multicap strategy. But it should be noted that he is also supported by one of the most able investment teams in the industry.  With Apoorva Shah relinquishing his responsibility, and Atul Bhole taking over the reins in June 2016 we need to wait and watch.

Birla Sunlife Frontline Equity Fund Gem

The 11,847 crore Birla Sun Life Frontline Equity Fund is a diversified fund with a bias for large cap stocks but it does take advantage of select mid cap opportunities from time to time. A skilled manager and his well-executed investment approach make this fund a compelling choice for investors. Manager Mahesh Patil is evidently mindful of the benchmark index S&P BSE 200 while investing. For instance, he invests largely in stocks chosen from the index. Year-on-year, Patil has ensured that the fund has delivered consistent returns. Its success can be attributed in no small measure to Patil’s deftly implemented investment approach. The manager’s stock-picking has been impressive. A growth bias is apparent as Patil focuses on factors such as ROCE, ROE and earnings growth potential. Despite the benchmark-awareness, Patil is no closet indexer as he is willing to deviate substantially from index weights in individual holdings. Patil also has utilised his understanding of market movements and stock price points skilfully. Tactical plays and a buy/sell pattern within long-held holdings are integral to the approach. But some caveats are in order. In an upturn that is not broad-based--in other words, when some sectors gain significantly more than others--the benchmark-consciousness may cause the fund to under perform peers that invest in an unconstrained manner. In addition, tactical plays add an element of timing risk. Discipline, bottom-up stock picking, and profit booking at opportune moments have stood the fund in good stead. Numbers are in its favor, consistency is clearly visible, and one can comfortably invest in this fund.