Monday, November 29, 1999

Concentrated play

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Equity markets have risen significantly over the last one year. Sensex has scaled nearly 76 per cent in calendar year 2009. Other indices such as BSE100 and BSE 200, too, have outperformed the benchmark index and gained almost 80 per cent and 83 per cent respectively during the same period. In order to cash in on the opportunities in the current markets, DSP BlackRock Mutual Fund has launched a new fund offer (NFO) called DSP BlackRock Focus 25 Fund. It is an open-ended equity scheme that will invest, largely, in top 200 companies by market capitalisation.The fundAs the name suggests, the fund will invest in equities and equity-related securities including equity derivatives of up to 25 companies that are among the top 200 by market capitalisation. The fund will be benchmarked against BSE Sensex and offers growth and dividend options. It will be managed by Apoorva Shah. The new fund offer is open for subscription till May 21.Asset allocation. The scheme will allocate 65 to100 per cent of its assets in equity and equity-related securities. It will invest up to 0-20 per cent of assets in equity and equity related securities in companies that have lower market capitalisation compared with the top 200. It will further allocate up to 35 per cent of assets in debt securities, money market securities and cash and cash equivalents.Investment strategy. The scheme will have a concentrated portfolio that aims to identify and select high conviction stocks. The strategy involves a combination of top-down and bottom-up analysis to identify sector and stock weightages in the portfolio. Top-down analysis dissects the macro-economic environment in order to understand the business cycle that various sectors are exposed to. It also involves understanding sector trends, such as scale of opportunity, pricing power, volume changes, government policy and international trends. Bottom-up involves an analysis of company-specific factors such as size, competitive position, salability, management quality, operational efficiency, financial parameters and valuations. On investment strategy, Anup Maheshwari, executive vice-president and head (equities and corporate strategy) says: "Investments will be broad-based in terms of sectors. So, in a way the fund will have a diversified approach in sectors and a selective approach in terms of stocks."Fund rationaleLast year markets registered a significant rise and all the indices registered positive returns. However, performance varied across market segments in the range of 76 per cent to 119 per cent (segments include Sensex, BSE 100, BSE200, BSE500, mid-cap and small-cap). Holding a positive outlook on equities over the long-term, Maheshwari believes that one major factor that drives markets is profit. Further, he expects the current year and the year ahead to witness growth in profits, which will be factored in by the markets.There has been significant performance divergence not only among sectors but also among stocks within sectors. This highlights the fact that besides sector selection, stock selection is extremely important. Quality stock selection will be this fund's forte.Peer comparisonFocus 25 would invest in up to 25 stocks as opposed to 50-80 stocks that other diversified schemes typically hold. Hence, the fund is actually a concentrated diversified scheme and offers nothing new to investors. The new fund bears a close resemblance to funds such as Sundaram BNP Paribas Select Focus, Kotak 30 and ICICI Prudential Focused Equity. The first two funds are relatively older funds and have outperformed the diversified equity fund category average over the three- and five-year horizon. On the other hand, ICICI Prudential Focused Equity is just a two-year old fund but has managed to deliver a robust performance over the one-year horizon.Upside and downsideThe scheme intends to maximise gains from its large-cap holdings and at the same time ensure a reasonable level of diversification by keeping sector selection flexible. However, with such a concentrated portfolio, the fund has both upsides and downsides. According to a report released by Sharekhan, large-cap stocks are most frequently traded on the bourses and, generally, do not suffer illiquidity. Historically, large-cap oriented funds have proved to be better investment options both in terms of returns as well as volatility. According to Prasunjit Mukherjee, a Kolkata-based mutual fund analyst, "Such a concentrated fund will have both advantages and disadvantages. The fund will be free from the hassles of tracking more stocks (nearly 50-80 stocks in a typically equity diversified fund) in a portfolio and will have a concentrated focus. Additionally, due to its limited exposure, it will fare well in terms of costs incurred in managing the stocks as compared to other diversified funds. The fund is expected to deliver better yield than a typical diversified fund, provided the fund manager makes the correct calls and spots the right opportunities. If not, it could also witness bad falls."What should you do?DSP BlackRock fund house has a proven track record. The fund, which will focus on only a few stocks, is likely to deliver high returns if the stock bets pay off. The fund will appeal to investors who have already created a corpus and now looking for a concentrated bet, says Mukherjee. Once invested, the investor needs to keep close track of the fund's performance.On the contrary, Dhirendra Kumar, chief executive of Valueresearch says: "Let the new fund prove its mettle and then go for it."If you wish to make a concentrated portfolio bet, go for it. However, if you prefer to err on the side of caution, wait for a couple of years for the new fund to prove itself and then invest in it.

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