While it is safe to go with the tried and tested—and that’s why we insist you choose from Mint50—there are always schemes waiting to claim their share in the limelight. We call them emerging stars. They may not yet have completed three years (we usually don’t recommend schemes that are less than three years old) but have done exceedingly well so far and show promise or may have been underperformers for a long time but are turned around by a change in fund management or sponsor. Here are five schemes waiting to make it to Mint50.
Mirae Asset- India opportunities
Mirae Asset India Opportunities Fund (MIO) is one of the most under-rated equity diversified funds. But the small-sized fund of Rs 152.6 crore packs in quite a punch. The fund’s track record has been impressive; it outperformed the category average in rising as well as falling markets.
Also see | Mirae Asset- India opportunities (PDF)
Although the fund is opportunistic and can invest in stocks across market capitalization, fund manager Gopal Agrawal prefers large-cap scrips. Between April 2009 and April 2010, the fund’s allocation to small and medium sized companies had gone up to 49%, but for most parts, Agrawal has restricted exposure to about 35%. Even in terms of diversification, MIO rarely goes beyond 5% in a single scrip. “Our international parent does not allow us to take exposure in derivatives. Also, being a new fund house, we are very mindful of the risks in the stock market,” says Agrawal.
Agrawal likes companies that borrow less from outside sources and instead grow with the help of internal accruals. “How scalable the business is something that we pay a lot of attention to,” he adds. Though the fund’s top holdings are very consistent, MIO keeps aside about 25-30% for churning. The core, up to 60-70% of the scheme’s corpus, follows a buy-and-hold strategy.
Badly bruised during the credit crisis that gripped the financial markets in the wake of the collapse of US investment bank Lehman Brothers Holdings Inc., Mirae Asset Global Investments (India) is getting back on track. If MIO keeps up its good performance—and we have reasons to believe it will—it won’t be long before the fund house gets noticed.
Ever since its launch in June 2007, AIG India Equity’s (AIE) fortunes have been volatile. On account of sticking purely to large-caps in 2008, the fund lost 56% that year compared with the category loss of 51%.
Also see | AIG-India Equity (PDF)
Things started to look up when the fund manager changed; its present fund manager, Huzaifa Husain, took charge in May 2009. One of the first things Husain did was to increase its allocation towards mid-cap scrips as he positioned the scheme as a flexi-cap fund with a bias towards large-cap stocks. From investing about 20-25% in mid-cap companies, the fund increased its allocation to at least 40% and up to 63% in October 2009. Apart from timely stock picking, this strategy helped the fund turn around its fortunes in 2009; AIE returned 95.79% in 2009.
Husain prefers companies that have healthy cash flows and a strong competitive advantage, such as brand, low-cost operations and distribution. He says: “I also prefer companies that have conservative accounting policies such as accelerated depreciation and mark-to-market forex accounting, which also reflects on the conservativeness of the management.”
“The management’s ability to allocate capital wisely is a very important aspect to us and this can be in the form of either opening a factory, or doing an M&A transaction or returning cash to the shareholders. This is by far the most important aspect which determines the valuation of companies,” he adds.
The year 2010 was a disaster for the scheme as two of its investments, Hero Honda Motors Ltd and Maruti Suzuki India Ltd, went wrong. While shares of Hero Honda fell In August 2010 on the news of a stake sale, Maruti’s shares fell on the news that the company will pay higher royalty to its Japanese parent Suzuki Motor Corporation.
The scheme seems to have taken a corrective course thereafter as it fell less (15.44%) in the recent market crash as compared with its benchmark index BSE 100 (18.6%) and the category average (17.65%)
In 2010, AIG International signed a sale agreement with Pinebridge Investments—an independent asset management firm owned significantly by Hong Kong-based Pacific Century Group. Pending approval from the capital market regulator, Securities and Exchange Board of India, the fund will then belong to Pinebridge.
At times, a change in fund management is all that it takes to salvage a sagging bunch of schemes. We expect the same to happen at BNP Paribas Asset Management Co. Ltd, where Anand Shah took charge as the chief investment officer from 1 April. Shah comes from Canara Robeco AMC where he had joined soon after Robeco—a Netherlands-based fund house—took a controlling stake in the erstwhile Canbank AMC and eventually was a part of the team that turned around Canara Robeco AMC schemes. During Shah’s term, Canara Robeco Equity Diversified Fund (part of Mint 50) returned 13.27% compared with 6.31% by the category average and did well in both rising and falling markets.
Also see | BNP Paribas-Equity (PDF)
BNP Paribas Equity Fund (BPE) is the fund house’s flagship equity scheme. With a corpus of Rs 64.2 crore (down from Rs 103.28 crore in September 2009), Shah hopes to inject life in this as well as other equity funds of the AMC. The scheme will aim to invest about 80% in large-cap scrips and the rest in mid- and small-cap companies.
Shah intends to enhance focus on research, while reducing it on markets and valuations. “Companies create wealth, not markets. People are bothered about who’s buying what, who’s selling what in the markets. Too much attention is paid to quarterly results. The focus should be on which businesses are doing well and are expected to improve,” says Shah. Another possible change could come in terms of a slightly more concentrated portfolio. He adds: “We shouldn’t be afraid to take high conviction in stocks.”
As of today, BPE’s top three sectors are banks (19.4%), software (16.4%) and consumer non-durables (8.4%).
ICICI Pru Emerging Bluechip
ICICI Prudential Focused Bluechip Fund (IPFB) has performance written all over it. And it has managed to catch our attention in an already-crowded large-cap segment. Having a focused approach, it prefers to concentrate on around 25 scrips. Looking at a mix of bottom-up (first choosing stocks, then sectors) and top-down approach (picking sectors first, followed by stocks), there have been times when IPFB’s top 10 holdings have accounted for at least 60% of its portfolio. For instance, in July 2008, the top 10 scrips were 67% of the scheme’s corpus. “We tend to pick stocks with conviction. Bigger exposure in such scrips helps us get a kicker in returns when these stocks do well,” says fund manager Prashant Kothari. Kothari also doesn’t shy away from taking large sector exposures, such as about 21% in banks and 12% in software as per its latest portfolio.
Also see | ICICI Pru Emerging Bluechip (PDF)
So far, its strategy has worked well as the fund has outperformed the category average in rising and falling markets. In 2009 and 2010, IPFB returned 91% and 27% compared with the category average’s 67% and 17%, respectively. Again, when markets crashed between 5 November 2010 and 10 February 2011, the fund protected its downside better than most other schemes; it fell by 15.72% compared with a category average fall of 16.67%. Its own benchmark index, Nifty, fell by 17.21%.
IPFB took some smart calls, such as picking up Bajaj Auto Ltd between Rs 300 and Rs 600 (it today at about Rs 1,450 after a stock split) as well as pitting Tata Consultancy Services Ltd against Infosys Technologies Ltd to hedge its portfolio. With a corpus size of just Rs 1,968.8 crore—and a concentrated portfolio—it has a higher risk quotient than many peers, but it has managed risks well so far.
Formerly known as UTI Mastergain Unit Scheme and renamed in 2005, UTI Equity is now managed by Anoop Bhaskar, who made a name in picking mid-cap stocks ahead of the market when he was fund manager at Sundaram BNP Paribas AMC. UTI Equity invests about 70% in large-cap scrips with at least 20% in mid-caps and not more than 5% in small-cap scrips.
Also see | UTI-Equity (PDF)
But the fund has had a painful past. During rising markets of 2006 and 2007, it was one of the worst performers on account of poor stock selection, concentrated portfolio and high cash levels. When Bhaskar took over in August 2007, things changed. In keeping with his style of holding a very diversified portfolio, Bhaskar increased the fund’s allocation to banks, consumer non-durables and software. “I like to play with more companies; I just can’t hold a concentrated portfolio,” says Bhaskar. On an average, UTI Equity has held about 85 scrips with not a single holding accounting for more than 5% on an average. Additionally, Bhaskar prefers to be closer to the benchmark index (BSE 100), especially if he is managing a large-cap-oriented scheme such as UTI Equity, though the scheme does pick up scrips outside the benchmark at times.
The fund doesn’t take cash calls much, though it was a bit late in deploying its cash in early 2009 when markets shot up. But it seems to have recovered as it gave 85.12% in 2009. It has done well in market downsides too, which lends confidence. Its shrinking corpus size and UTI AMC’s consistent strategy of merging schemes (it has many diversified equity funds) are a concern, but if the good performance continues, these are only minor quibbles.
Graphics by Ahmed Raza Khan/Mint