Mumbai: Category: India ELSS
Right moves: Sundaram BNP Paribas Asset Management Co.’s head of equities Satish Ramanathan.
Sundaram BNP Paribas Asset Management Co. Ltd has won the Morningstar India Pvt. Ltd award for the best fund in the equity-linked savings schemes, or ELSS, category in 2008. Morningstar India is the local arm of Morningstar Inc., a US-based independent research provider on mutual funds, stocks, hedge funds and other investment alternatives.
Sundaram BNP Paribas Tax Saver has beaten 11 other funds in the ELSS category. Even though there are 25 such funds, only 12 were considered for the awards.
Investments in ELSS are exempt from income tax up to a maximum limit of Rs1 lakh. These investment plans have a lock-in period of three years.
Overall, these funds, managing Rs10,100 crore at the end of December, offered an average one-year return of –55.2% and three-year annualized returns of –4.3%.
The poor returns are a reflection of the performance of equity in India, in which these funds invest. India’s benchmark equity index, the Bombay Stock Exchange’s Sensex, was down 52% in 2008.
Satish Ramanathan, head of equities at Sundaram BNP Paribas Asset Management, manager of the winning fund with assets worth Rs499 crore under management, spoke on the long-term and conservative nature of his fund and the downside protection that he tries to provide to investors. Extreme pessimism on equities, according to him, can be as dangerous as “irrational exuberance”. Edited excerpts:
What’s the investment philosophy behind the fund?
To look at longer-term opportunities and protect downsides for investors. We are conservative; we want to minimize losses and look at the bigger investment picture.
How do you plan to maximize returns in a volatile and shaky market?
Although share prices are volatile on account of low liquidity and extreme panic, we will have to focus on companies that have growing businesses and strong cash flows. We also have to be aware that extreme pessimism can be as dangerous as “irrational exuberance”. We are now looking at company-specific strategies, questioning as to what can go wrong and then looking at a probabilistic upside and downside and include them in the portfolio. In such a volatile environment, the main objective is to protect capital.
How different is your fund from its peers?
Our fund is based on our beliefs and philosophies, and we respect every other fund in the category. As a fund house, we try to look at all aspects before concluding on a stock’s inclusion. We are willing to trim positions or take a relook in case our call is not working.
How do you pacify your investors and draw in more?
Indeed, we cannot avoid the underlying performance of the asset class. Investors also appreciate that a fund manager has to track the underlying asset class.
What kind of investor should invest in your fund?
Those investors who are looking for maximum tax savings and have a longer term perspective in equities will find investment in our ELSS fruitful.
What is your outlook on the equity market?
Equity markets are extremely volatile in the short term, but we think some sectors will outperform in this period. Local businesses in underpenetrated segments will still remain growth businesses in our country.
Category: India moderate allocation
Perfect blend: DSP BlackRock Investment’s Apoorva Shah. Ashesh Shah / Mint
DSP BlackRock Balanced Fund, run by DSP BlackRock Investment Managers Ltd, has been named the best fund in the moderate allocation category, by Morningstar India Pvt. Ltd, which defines moderate allocation funds as those that seek to provide both capital appreciation and income by investing in stocks, bonds and cash. These funds tend to hold relatively larger positions in stocks but not exceeding 75% of the portfolio.
According to data provided by Morningstar, India has 49 such moderate allocation funds, collectively managing Rs10,600 crore. Only 13 of them, however, were considered for the awards.
The beating that equity markets took since early 2008 has eroded the returns on these funds. The annual returns for this class of funds was –33.9% for 2008. That said, this category has fared better than pure equity funds. These funds, otherwise called balanced funds, have a portion of their portfolio in fixed-income securities.
DSP BlackRock Balanced Fund, which had assets worth Rs427 crore December-end, is managed by Apoorva Shah, senior vice-president and fund manager at DSP BlackRock Investment Managers.
Shah spoke about how he consciously kept the equity allocation of the fund at the bare minimum required by regulations. Even within this, a relatively larger exposure to large-caps has helped the fund withstand a plunging market. Edited excerpts:
What’s your investment philosophy?
In the balanced fund, 65-75% of the portfolio is typically invested in equity, and the remaining in fixed income assets. Within equity, we roughly put 50% into large-caps and spread the rest between mid-, small- and micro-caps.
In the current environment, how do you allocate between equity and debt to maximize returns?
In March, it was evident that equities will likely remain volatile for a period and, therefore, we reset the equity allocation at 65%, from 75% earlier. We will maintain that. And within equities, we’ve seen an extended period of outperformance by large-caps. So within the 65% allocated to equity, almost 70% is now in large-caps. We will maintain that.
The sector and stock selection within the equity portion remains the same as in the DSP BlackRock Top 100 Equity, the DSP BlackRock Small and Mid Cap Fund and DSP BlackRock Micro Cap Fund. In all three funds, we went underweight on capital-intensive and rate-sensitive sectors such as materials, engineering, infrastructure, real estate and banking, and went overweight on defensive sectors such as consumer staples and pharmaceuticals. We are likely to keep this balance for the time being.
How different is your fund from the peers?
You will have to look at whether they have gone above 70-75% in their equity allocation, while we remain at 65%. Besides, the sectoral weightage and stock picks will be different for the peer group.
Even though you are a top performer, all balanced funds have shown negative returns. How do you woo fresh investments?
There are two advantages of being in a balanced fund. One, the debt portion of the fund is tax-free. The second is that you maintain a certain asset allocation throughout the life of a fund. For instance, let’s say a year ago, you wanted a 70:30 allocation towards equity and debt, respectively. So you invested Rs70 of your Rs100 in Top 100 Equity (the equity fund), and Rs30 in Bond Fund (a debt fund) separately. After what we’ve gone through in the last year, your allocation would now look skewed more towards debt than equity, as Top 100 Equity would have taken a bigger hit than Bond Fund. The Balanced Fund allows you to maintain the allocation at 70:30, as the portfolio is readjusted continuously to keep the allocation intact.
What kind of investor should invest in this fund?
On the equity side, the risk goes up because the fund is also investing in mid-caps. But the investment in fixed income neutralizes this effect. So it’s for an ultra-conservative investor, who wants to protect the downside. By virtue of the equity exposure being lower, you’re taking on less risk. Besides, the twin objectives of tax benefit (on debt side) and maintenance of asset allocation would be important in choosing a balanced fund.
Your outlook on the debt market?
Interest rates are likely to go up, because there’s less money in the system and a huge government borrowing programme will crowd out private investments. There is a higher risk of non-performing assets and delayed payments. The fixed income assets we own tend to have a maturity of not more than a year. So if interest rates go up, we won’t take a hit because shorter maturity debt is less risky.