Mumbai: India large-cap
DSP BlackRock Top 100 Equity Fund, from the stable of DSP BlackRock Investment Managers Ltd, a joint venture between Hemendra Kothari’s DSP group and New York-headquartered asset management firm BlackRock Inc., has won Morningstar India Pvt. Ltd’s award for the best large-cap fund in 2008.
Playing safe: DSP BlackRock’ Apoorva Shah says the DSP BlackRock Top 100 Equity Fund is a blue-chip portfolio and hence less risky than the entire market. The fund suits the appetite of a conservative investor. Last year, the most conservative investor made the most returns. Ashesh Shah / Mint
Morningstar, an independent research provider on mutual funds, hedge funds and other investment alternatives, defines a large-cap fund as one that has at least 70% of its portfolio in stocks that make up the top 70% of the capitalization of the Indian equity market.
According to Morningstar, there are 129 open-ended large-cap funds in India, managing about Rs58,000 crore at the end of December. However, only 60 such funds were considered for the award.
With equity markets in a firm bear grip since early 2008, the one-year return—up to December—for the category was -52.9%, and the three-year annualized return, 2.2%. The Sensex, India’s benchmark equity index, was down 52% in 2008, after posting returns in excess of 40% over the last three years.
DSP BlackRock’s senior vice-president and fund manager Apoorva Shah manages DSP BlackRock Top 100 Equity Fund, which had assets worth Rs953 crore at the end of December.
Also See DSP Blackrock Top 100 Equity (G) VS BSE 100 (Graphic)
In an interview, he spoke about the investment philosophy of the fund and how to maximize returns in a volatile market. Edited excerpts:
What is the investment philosophy behind the fund?
We invest in the large-caps, which by our definition are the Top 100 companies by market capitalization. These are well-researched companies and there are not too many negative surprises from them. Besides, the stocks are liquid, and they are typically safe investments. The Top 100 definition is dynamic in the sense that we readjust our portfolio when some stocks go out of the list and new ones replace them.
How do you plan to maximize returns in a volatile and shaky market?
We have a top-down and bottom-up approach in choosing stocks. We choose the sectors on a top-down basis and since March 2008, when the bear grip on the market intensified, we changed the weightage on sectors. 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 will continue with this weightage for sometime.
How different is your fund from others in its peer category?
We have a large percentage (around 15-20%) of our portfolio in the Nifty. We buy Nifty futures and this helps us diversify. Besides, it’s a concentrated fund, with 40-45 stocks, and an active management style.
Even though you are a top performer, all equity funds have shown negative returns. How do you pacify your investors and draw in more?
We show our investors long-term returns, and emphasize on longer investment horizons. For example, we show them that from the peak of 2001 to, say, 2005, investors made money. Similarly, from the peak of 2008 to five years down the line, they will make money. Besides, we convey that we’re protecting them from a total downside, we are outperforming the benchmark and are in the top quartile in the peer group.
We tell them about the benefits of diversification with regards to other asset classes. If gold is performing well today, it’s not necessary that it will tomorrow. So it’s not wise to put all your eggs in one basket.
What kind of investor should invest in this fund?
It’s a blue-chip portfolio and hence less risky than the entire market. It suits the appetite of a conservative investor. Last year, the most conservative investor made the most returns. But in the current market, mid-caps may outperform large-caps, and in the long run, the returns from a large-cap fund could be less than from a small- and mid-cap fund.
What is your outlook on the equity market?
The markets are still bearish and they haven’t bottomed out. The depth of the global downturn is severe, and that has affected total demand in the system. Also, there is no easy availability of credit—the lifeline of business. If businesses are not able to borrow, they will not be able grow.
The other point is that India is battling a large fiscal deficit, which is about 11% of gross domestic product for this year and the next. That means the government will borrow around Rs5 trillion from the market. So, the credit available for the private sector will be much less. In turn, cost of money, or interest rates, will go up for the private sector.
Only when the international crisis abates, and more money is available, will we see a bottoming out. That may take up to six months.
India small / mid-cap
Reliance Capital Asset Management Ltd’s Reliance Growth Fund has won Morningstar’s 2008 award for the best fund in the small and mid-cap category.
Managed by Sunil Singhania, it has beaten 38 other funds in this category that were considered for the award. Overall, there are 69 funds in this category, collectively managing about Rs17,100 crore. Morningstar defines small- and mid-cap funds as those that invest at least 75% of their total assets in stocks that primarily constitute the bottom 30% of the capitalization of the equity market.
Small- and mid-cap stocks have been hit much harder than the large-cap stocks in the current market meltdown that started early 2008 after the Sensex, the Bombay Stock Exchange’s benchmark index, hit its lifetime high in January.
Morningstar data shows that the one-year average returns for the small- and mid-cap fund category was –60.1%, while the three-year annualized returns came in at –6.4%.
Sunil Singhania, senior fund manager at Reliance Capital Asset Management, who manages the Rs3,418 crore fund, spoke about the fund’s flexible investment style that helps it manage volatility, and the relatively big large-cap and cash exposure that helped it weather much of the market storm. Edited excerpts:
Success secrets: Reliance Capital Asset Management’s Sunil Singhania says the fund’s flexible investment style helps it manage volatility.
What is your investment philosophy?
Reliance Growth Fund is predominantly a mid-cap focused fund. Nearly 70-75% of the corpus is invested in mid-cap companies and the balance 20-25% in larger companies. The small exposure to large-caps gives the fund the opportunity to capture the beta of the general markets to some extent and also provide stability in terms of volatility as well as liquidity to the scheme.
In mid-caps, the idea is to invest in companies with a longer time frame in mind. Though the fund tends to be growth-oriented, we consider ourselves opportunistic investors.
In any growing economy such as India, being flexible to different investment styles is very necessary as markets and stocks in near to medium term will tend to be volatile.
We also look at value stocks and invest in them regularly. The core philosophy of the fund is to generate consistent risk-adjusted returns over a longer time frame.
How do you plan to maximize returns in a bear market?
The last one year or so has been a very challenging period, one that has not been seen for years. With the world being so integrated, it’s obvious that India and Indian equities have also witnessed similar volatility and a crisis of confidence. The financial meltdown has resulted in a challenging business environment, and along with a depreciating rupee, has created a scenario where corporate profitability across sectors is being threatened.
From our perspective, we have always used cash as an effective investment tool. For the last one year, Reliance Growth Fund has had cash of approximately 25%.
Despite being a mid-cap focused fund (which have gone down as a group by 75-80%) Reliance Growth Fund, dueto its cash strategy (that worked), and some exposure to large-caps has been able to withstand the fall relatively better.
We are very careful with our cash and we feel that in the mid-cap space, there are now many exciting opportunities emerging. At the same time, the macroeconomic environment will improve gradually and slowly. We are not rushing in to deploy the cash, but taking measured decisions and working harder in our analysis of companies before taking a big call. Using derivatives for short-term cash allocation and hedging and options to enhance returns have also worked well in an environment where volatility has been very high.
How different is your fund from others in its peer category?
I would leave that to external research outfits (to judge).
All equity funds have shown negative returns. How do you pacify your investors?
Every long-only equity fund has a mandate to invest in equity markets. Thus, it is obvious that if the markets fall the way they have fallen, all equity funds in that short period will also show negative returns. The true comparison has to be over a longer time frame.
Just as a case in point, between September 1995, when Reliance Growth Fund was launched and now, the Sensex has gone up by roughly three times, but the fund has appreciated by as much as 20 times.
Longer time frame investors are still okay. It’s the investors that have started investing over the last year or so who are staring at depreciation in their investment value.
Our attempt is to continuously interact and educate our distributors and investors about the dynamics of equity investing and how one has to compulsorily have a longer time frame.
What kind of investor should invest in your fund?
Typically, an investor has to have a longer time frame for any equity-related investment. We have enormous confidence in the growth story of India over a very long time frame. An equity investor in India should share the optimism about India as an economy and Indian equities.
Your outlook on the equity markets?
In the near term, there will be all sorts of negative news flow. Also, the global market performance will in the near term impact Indian markets. However, we are seeing a slow but sure improvement in many lead indicators. Cement and steel sales, and car and motorcycle sales have been very buoyant.
In India, at the grassroots, demand continues to be quite good for a range of products and services. A clear deviation in stock market performance is also visible over the last few months across various countries.
Returns from China, Russia and Brazil are year-to-date positive even though global markets have been plunging. India has also been outperforming, having fallen much less than the developed markets, though the country has been underperforming other Bric countries.
Along with China, India remains one of the fastest-growing economies in the world. We are optimistic about the Indian economy and Indian equity, notwithstanding the near-term volatility.
The Morningstar Fund Awards are given annually in recognition of those funds and fund groups that have added significant value within the context of a relevant peer group for investors over the past one year and also over the long term.
A strong one-year return isn’t enough; funds must also have delivered strong three-year risk-adjusted returns in order to win an award.
Only funds with three-year performance history domiciled in the Indian market are eligible to receive an award. Sector funds, floating-rate funds, fixed-maturity plans, global funds, arbitrage funds, index funds, exchange-traded funds and closed-ended funds are excluded.
The smallest 10% of funds in assets under each Morningstar are excluded from the awards based on the December-end portfolios. In addition, funds with less than Rs50 crore in assets on 31 December 2008 or the nearest date for which assets are available were omitted.
Return score = 70% of total score, as below
One-year: 30% of total score based on 1-year return percentile rank in Morningstar category
Three-year: 40% of total score, based on three-year return percentile in Morningstar category
Risk score = 30% of total score, based on three-year Morningstar risk percentile rank in Morningstar category
Morningstar then reviews the top scoring funds on qualitative measures, which may include fund manager/investment management team’s experience; investment and risk management process followed by the asset management company; fundamental risk stemming from a fund’s holdings or concern about its management. Funds deemed to have deviated from their stated mandate are removed from consideration.
The fund with the lowest score that meets Morninstar’s qualitative checks in the eligible Morningstar category or grouping receives the award for that category or grouping.
Graphics by Paras Jain / Mint