Mutual Fund - Sundaram BNP Paribas Select Midcap Fund : Analysis

Sundaram BNP Paribas Select Midcap — Favouring fertilisers

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Large-cap stocks have borne the brunt of the steep market corrections. Some mid-cap and small stocks too have lost heavily in the last two months. We take a look at a pure mid-cap fund, how it has re-shuffled its portfolio during the six-month period ended February.

Sundaram BNP Paribas Select Midcap assets have dropped marginally over this period. The fund has a well-spread portfolio. It consists of 80 stocks and the top 10 stocks accounted for 29 per cent of the assets. The fund has increased exposure to sectors such as financial services, fertilisers and chemicals, energy and construction. Sectors out of favour are cement, industrial manufacturing, media, pharma and services. The under-performing IT sector too has moved out of the portfolio.

Exposure to finance sector

With increased asset allocation to the finance sector, the fund has stepped up exposure to Bank of Baroda, Union Bank of India and Max India. The stocks that moved into the portfolio were Canara Bank, Federal Bank and India Infoline while exposure to ING Vysya Bank was reduced.

On the back of a good monsoon and anticipating good earnings from the fertilisers and chemical sector, the fund has increased the weight of the sector in the portfolio by 80 per cent. Exposure to the stocks of Tata Chemicals and Chambal Fertilisers was enhanced substantially. Gujarat Alkalies and Chemicals and Himadri Chemicals were the new additions to the portfolio.

Construction stocks, most sought till some time ago, have undergone re-rating, along with the ongoing market correction. In the past six months, the fund has increased asset allocation to the sector; however the fund was cautious in selecting the stocks. It has pruned exposure to Hindustan Construction and Madhucon Projects.

The weight of the cement sector in the portfolio was reduced over the quarter. Birla Corp, Century Textiles and Orient Paper moved out of the portfolio. Exposure to Madras Cements was trimmed. The fund viewed capital goods cautiously and over the past quarter it pruned exposure to the sector. It reduced holdings in stocks such as ABG Shipyard, Bharat Electronics, Punj Lloyd and Thermax.

Metals continue to be the preferred sector and cornered close to 16 per cent of the assets. As the stocks rallied over the past six months, the fund preferred to reduce holdings in stocks such as Maharashtra Seamless, Monnet Ispat, JSW Steel and Welspun Gujarat Stahl Rohren.

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Mutual Fund - Birla Sun Life Frontline Equity Fund : Analysis

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Birla Sun Life Frontline Equity Fund has been a consistent performer over a three and five-year period. It has outpaced the benchmark and category average over these time frames.

The fund predominantly invests in large-cap growth stocks, but has included mid-caps in recent portfolios. It has contained losses well during the ongoing market correction as well as the two previous corrections, beating the benchmark on both occasions.

The fund hasn't been subject to high volatility; that is reflected in the returns generated through the SIP route in this fund. Returns on systematic investments in this fund trailed lump sum returns over the past five years. Since the market continues to be in a volatile phase despite the significant correction, investors can consider staggered investments or SIPs.

Performance: In the past one-year, the fund has under performed large-cap funds such as DSPML Top 100 and HDFC Top 200 by a good margin, as well as its benchmark, the BSE 200, marginally. In the latest portfolio, one-fourth of the assets have been invested in mid-cap stocks with market capitalisation of less than Rs 7,500 crore.

During the ongoing market correction, select mid and small-cap stocks have undergone heavy selling pressure, on institutional selling. The steep correction in banking and construction has impacted its performance as these sectors accounted for close to one-fourth of the total assets.

Portfolio Overview: Ahead of the recent correction, the fund took a cautious stand in stocks such as BHEL, Punj Lloyd, Balaji Telefilms and Indian Bank and trimmed exposure. It has taken advantage of the recent correction in the construction stocks and accumulated HDIL and Nagarjuna Construction substantially. In the past two months, the fund has increased exposure to Reliance Industries and significantly added to holdings in Reliance Communication; the stock has undergone huge correction from its peak.

Fund facts: The fund, managed by Mr Mahesh Patil, was launched in August 2002. The NAV is Rs 63.40.

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Mutual Fund - Sundaram BNP Paribas Select Focus Fund : Analysis

Sundaram BNP Paribas Select Focus: Invest thru SIP

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Recent market declines may offer a good opportunity for investors to acquire exposures to frontline stocks in the listed space. Those looking to do so can consider investing in the Sundaram BNP Paribas Select Focus Fund.

Despite a sharp reversal in this fund's NAV during the recent market correction (down 28 per cent from the January peak), the fund remains among the top performers in its peer group of large-cap funds, based on one year returns.

It also sports a good 3 and 5-year return record. However, investing through the systematic route may be a better course to follow with this fund, as this may help the investor take full advantage of volatility in the market as well as in the fund's NAV.

Suitability: With the bulk of its holdings in stocks with a market capitalisation of over Rs 10,000 crore, Sundaram Select Focus may carry lower volatility of returns than funds with a flexicap approach or those with big allocations to mid-cap stocks.

Recent market events have reinforced some of the risks associated with mid-caps in terms of high intra-day volatility, high impact cost and the drying up of liquidity during a corrective phase.

However, the fund does carry a higher degree of risk when compared to large-cap funds such as the Franklin India Bluechip or HDFC Top 200 Fund, given its much higher Beta (tendency of returns to swing relative to the market). This has been compensated through its much higher returns over 1 and 3-year time frames.

Performance: After taking a significant knock in the recent corrective phase (28 per cent fall from peak NAV against 22 per cent fall in Nifty), Sundaram Select Focus's one-year returns stand at about 39 per cent. This compares favourably with other funds with a large-cap focus; it also places the fund near the top of the diversified category for a one-year time frame.

The fund's relative underperformance during the correction can be attributed to its focussed exposure in sectors such as energy, financials and metals (top performers earlier) as well as its significant holdings in the Reliance pack, which have borne the brunt of the recent decline.

With valuations in some of these stocks correcting to more reasonable levels, they may hold the potential to participate in a recovery.

The fund was nearly fully invested in end-December, making the NAV more vulnerable to the corrective phase. However, it appears to have booked profits on part of its portfolio soon after the start of the corrective phase and closed January with a 18 per cent cash position in its portfolio.

Cash balances remained high in February suggesting that the fund continued to wait for more attractive valuations before deploying its funds. The high cash position may limit the fund's ability to ride an upside, in the event of a sharp or quick rally in the equity market. In the latest quarter ending February, the fund has pared exposure to sectors such as electrical, engineering and media while adding to exposure in pharmaceuticals, housing finance and fertilisers.

HDFC, GAIL, PNB and IOC are some of the key additions to the portfolio, while Lanco Infratech, IDFC and BHEL were among the main exits.

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Mutual Fund - Magnum Equity Fund : Analysis

Magnum Equity Fund: Energy retains charge

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Magnum Equity is a fund that invests mainly in large-cap (Rs 10,000 crore) stocks. The investment in mid and small-cap stocks is at insignificant levels. The stocks in the portfolio indicate that the fund invests in highly liquid stocks. The fund has bettered the returns of its benchmark, BSE 100, over three- and five-year periods but under-performed it during the last one year.

During the period September 2007 to February 2008, the fund's corpus grew 19.5 per cent to Rs 377 crore, while the NAV per unit has grown 13.9 per cent to Rs 36.9.

An analysis of the fund during this period indicates that the portfolio is minimally churned in terms of stocks.

Sector Moves: Energy (19.8 per cent), the top sector held, has seen exposures increased over two-fold over the September-February period. Substantial hike in exposures is also seen in the Industrial manufacturing and construction sectors. Financial services exposures have been mildly reduced. The metals sector has seen increased exposure. All of these sectors had a good year and also had to face maximum heat during broader market correction in the last couple of months. In a contrarian move, the Pharma sector exposure has been hiked. However, Infotech and automobiles, the other sectors out of favour over the last year, have seen exposures pared. Media and consumer goods sectors have also seen exposures trimmed and so has cement.

Stock Moves: The fund holds 25 stocks in its portfolio, making it compact. Just four stocks found their way into the portfolio during the last six months — Suzlon Energy, Tata Chemicals, Unitech and Mundra Port. These stocks gained between 11 and 49 per cent during this period.

Only eight stocks were exited during these six months. Dish TV and Ambuja Cements stocks that lost over 9 and 27 per cent, respectively, have been shown the door. Interestingly, HUL, ITC, and Siemens, stocks that gained between 9 and 27 per cent, have also been exited. Hindustan Zinc and Bajaj Holdings have also been sold completely.

Jindal Steel and Power, Reliance Industries, BHEL, L&T, Jaiprakash Associates are among the common stocks held during the last six months.

Unusually, Kotak Mahindra Bank figures among the top three stock holdings of the fund. Bharti Airtel, Sun Pharma, Tata Motors and Pantaloon Retail are among some of the prominent common stocks held during this period.

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Mutual Fund - ICICI Prudential Dynamic Plan Fund : Analysis

ICICI Prudential Dynamic Plan — Petroleum in top slot

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ICICI Prudential Dynamic Plan is a diversified equity plan that follows the growth investment philosophy to invest in a portfolio of large, mid and small-cap stocks. It has the mandate to move gradually into cash, as the market gets over-valued.

Over the past one year, the fund went into cash as high as 25 per cent in the last April and in the recent portfolio the cash component stands at 15 per cent. The petroleum sector continues to occupy the top slot and in the past six months ending February the fund has increased asset allocation to auto, capital goods, industrial products and ferrous metals.

Pesticides finance and non-ferrous metals were added afresh to the portfolio. The power stocks, which have grown exponentially in the last two quarters, were viewed cautiously and the fund pruned the asset allocation gradually from 7.5 per cent to less than half a per cent in the latest portfolio. Banks, software, pharma, consumer non-durables and cement were pruned.

The petroleum sector has cornered 12.1 per cent of the portfolio and out of that 97 per cent of the assets was invested in Reliance Industries and the rest with the stock of HPCL. With a reduced asset allocation to banking sector, the fund trimmed holdings in the Federal Bank and ICICI Bank. In the finance space, HDFC was added afresh to the portfolio. It appears that the fund viewed the media stocks cautiously on back of a continuous surge in the raw material cost. The holdings in Deccan Chronicle and HT Media were pruned over the quarter. Instead, it stepped up exposure to entertainment stock Zee Entertainment in the past six months.

The weight of the auto sector in the portfolio was enhanced. Bajaj Holdings and Investment was the new entrant while the holdings in Mahindra and Mahindra were reduced. In the auto ancillaries space, the fund accumulated the shares of Apollo Tyres, and instead cut holdings in Sundaram Clayton by more than 50 per cent the past quarter.

The fund has taken a contrarian view in the capital goods space when most funds pruned exposure to the sector, the fund gradually stepped up holdings. The stock of Texmaco and AIA Engineering was held on to without much change while Crompton Greaves holdings were pruned by more than 50 per cent in the past six months. The fund used the recent correction to increase Larsen and Toubro, holdings of which doubled in the last two months.

The fund accumulated TCS and the holdings increased by more than 200 per cent in February. The mid-cap stock Subex Azure was the new addition to the portfolio.

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Mutual Funds- Templeton India Equity Income Fund Analysis

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With its value orientation and allocation to stocks outside the Indian market, Templeton India Equity Income Fund (TIEIF) is a reasonable option for investors looking to diversify their portfolio.

The fund's NAV has declined about 21.5 per cent over the quarter, while the Sensex has fallen 26 per cent and the average diversified equity fund (invested in Indian stocks) has shed 32 per cent of its value. Though the fund has managed to contain the decline in its NAV to levels below the Sensex during the correction, this is true of other international funds as well.

Suitability: With a focus on stocks offering high dividend yield in India and abroad, TIEIF is well suited to conservative investors with moderate return expectations. It is also a good portfolio diversifier on two counts. One, its dividend yield focus gives it a tilt towards "value" stocks.

Most Indian equity funds tend to be managed in the "growth" style, actively looking for stocks that capitalise on the India growth story. As the "value" and "growth" styles tend to outperform in cycles, investors with a sizeable equity portfolio may benefit by having a "value" oriented fund in their portfolio.

Two, the rally in the Indian market over the past four years has trimmed the dividend yield on Indian stocks to unattractive levels. TIEIF, by allocating a portion of its portfolio to high dividend yield stocks in other emerging markets, is able to build a portfolio that offers a much healthier dividend yield.

Performance: With a return of about 22 per cent on a compounded annual basis since launch, TIEIF has outperformed the domestic market benchmarks (the BSE-200 managed a 13 per cent return since the fund's launch). The fund has fared particularly well during the recent choppy phase in the market, gaining more than the index during the rallies and losing less than it, during the corrective phases.

The fund has not been an aggressive churner of the portfolio. For the domestic component, high dividend yield stocks from the large-cap basket, such as ONGC, SAIL, Hindalco and Tata Chemicals have been among top choices.

The fund has also ventured into some mid/small-cap holdings such as Union Bank and Sundaram Finance in recent times, in search of higher dividend yield. About a fifth of the assets were in stocks with a market capitalisation of less than Rs 10,000 crore in February. This may add to the return potential in the medium term.

For the overseas component, now at over 32 per cent of the portfolio, the fund has diversified widely across markets as well as sectors, using its strong emerging markets team to identify picks from sectors not well represented in the Indian listed space.

Overseas exposures such as Anglo American Plc (US), Lukoil Holdings (Russia), and Ternium SA (South Africa) have been used to widen the basket of commodity and energy stocks. United Microelectronics (Taiwan), Samsung Heavy Industries (Korea) and Shanghai Power Machinery are some of the industrial products and durables exposures that figured in the February portfolio.

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Mutual Funds - DBS Chola Opportunities Fund Analysis

 

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The aggressive investor can consider investment in DBS Chola Opportunities Fund. After a sedate performance three years ago, and trailing the category average for two consecutive years, the fund has come a long way. In the past three years, it has stepped up its performance, outpaced the benchmark and category average by a good margin

Due to improved performance, the fund's asset under management has grown substantially during the past one year. From hardly Rs 10 crore, the asset size has grown, and, especially in the last quarter, surged to Rs 72 crore.

A small asset size holds out both advantages and disadvantages. In a choppy market, the fund has the flexibility to churn its portfolio at a faster pace compared to bigger players, thereby the fund can contain the loss better. The disadvantage is that due to low asset base, the fund will find it difficult to allocate the asset across all the performing sectors.

But DBS Chola has handled the task better over the past two years by actively changing the portfolio. On an average, not less than 15 new stocks found their way into the portfolio every month. Given the aggressive play, the fund may skip a bull rally like the one witnessed in the past few years prior to the ongoing correction. Hence, an investor who prefers to time his market moves and is willing to take a risk-reward trade-off can consider investing in this fund.

Performance: The fund's NAV has grown by 43 per cent and outpaced the benchmark by 22 percentage points and the broader index CNX 500 by 23 percentage points. The fund, over the quarters, has changed the investment pattern from a large-cap bias to more of a flexi cap strategy. The fund, despite allocating close to 45 per cent of the assets to mid and small-cap stocks, has contained the loss during the ongoing correction.

Portfolio overview: The fund has a well-spread portfolio and consists of 35 stocks in 27 sectors. Even the large cap stocks have not been held for more than six months.

However, there are some exemptions in the mid-cap segment. In sector allocation, the fund moved out of capital goods prior to correction. It has utilised the deeper correction in the construction space to accumulate stocks for the past one month.

 

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Indian Economy - A Note on The Economy

A Note on The Economy

Inflation :

The rate of Inflation fell below six per cent after more than two months and stood at 5.74 per cent during the last week of 2006-07 against 6.39 per cent a week ago despite rise in prices of major food products as well as some fuel and manufactured items. This resulted in average inflation standing at 5.18 per cent for 2006-07, within RBI's projection of 5-5.5 per cent. Inflation had averaged 4.46 per cent during 2005-06.

The fall in inflation during the week ended March 31 might ease pressure on RBI to tighten monetary policy. The decline in inflation would also give some respite to the government, which has been struggling hard to bring down inflation within RBI's projection of 5-5.5 per cent. Worried over the political fallout of the continuing high prices of essential commodities, the Government decided to import additional 15 lakh tonnes of pulses over the next 6-8 months to bring down prices.

The Government is concerned that despite the import of about 18 lakh tonnes of pulses in 2006-07, the prices have not come down to the desired level. The customs duty on import of pulses has already been reduced to zero level till August 1. India is facing an estimated shortfall of 3.2 million tonnes of pulses.

Monetary situation :

Strong credit and economic growth could still see the central bank follow up a series of recent tightening with a rate rise at its April 24 policy review. The Reserve Bank of India (RBI) has raised the reserve requirement for banks three times since December to rein in cash in circulation and has increased its main lending rate by 50 basis points this calendar year. The short-term lending rate now stands at 7.75 percent, its highest in nearly 4-½ years.

Finance Minister P Chidambaram said the government and central bank wanted to moderate bank lending, which is growing at annual rates of about 30 percent, without hurting growth.

Interest rates :

Rates on the inter-bank call money market have crashed to a nineteen-month low of 1.75-2.25%. The spending activities of the government, which till end- March had parked a large sum of unspent funds with the central bank, could be responsible for the sudden spurt in liquidity. The overnight interest rates fell to their lowest in more than 19 months on Thursday as cash supplies were boosted by higher government spending and bond redemptions.

The yield on the benchmark 8.07% 2017 paper ended Apr 12 at 8.07%, up from the previous close of 8.05%.

Industrial Production :

Industrial production slowed to 11% year on year in February from a revised 11.4% in January, mainly because output of consumer goods declined 90 basis points to 7.6%. It could be a sign that consumers are beginning to indulge less as interest rates rise, because consumer durables output - which are largely based on orders from wholesale and retail dealers — fell a startling 370 basis points to 1.6%. Fifteen out of the seventeen manufacturing sectors have posted a positive growth in February.

Tax Collections :

The government is hopeful of achieving the revised direct tax collection target of Rs 2,29,272 crore for 2006-07.According to latest figures, the government has collected Rs 2,23,797.1 crore, comprising Rs 1,41,915.4 crore of corporate tax, Rs 71,011.4 crore of personal income tax, Rs 5,331.7 crore of fringe benefit tax, Rs 4,729.5 crore of securities transaction tax and Rs 505.4 crore of banking cash transaction tax. The complete data should be available by mid-April.

The government has set a higher target of Rs 2,67,000 crore for direct tax for this fiscal

The country`s customs duty revenues continue to be buoyant with collections for the Apr.-Feb. 2007 period recording a 35.27% increase to Rs 776.93 billion against Rs 574.34 billion in the same period previous year. The government has now achieved the budget estimate of Rs 770.66 billion for the customs duty collections in 2006-07. It had recently revised the customs duty collections target for 2006-07 to Rs 818 billion, which was expected to be achieved comfortably going by the current trend in collections.

However, excise duty collections continue to be a `laggard` and a `worrisome tax` for the government. In Apr.-Feb. this fiscal, excise duty collections grew 5.8% to Rs 1,015.71 billion against Rs 960.29 billion in the same period previous year. Going by the current trend in excise duty collections, it may be difficult for the government to achieve the revised estimate of Rs 1,172.66 billion for 2006-07. The finance minister, P Chidambaram, had in the recent budget lowered the excise duty collection target from Rs 1,190 billion to Rs 1,172.66 billion. He has also said that the government would pay more attention to excise duty in 2007-08.

Official data released by the government showed service tax collections of the centre going up 64.42 % to Rs 288.77 billion during Apr.-Jan. 2007 against Rs 175.63 billion in the same period previous year.

Source - HDFC

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