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Though we recommend equity- and many debt-oriented investments for the long run, a portfolio needs a review twice a year. Mint50, our curated list of 50 investment-worthy funds, is no exception. We do a thorough audit twice a year. Funds that we want to replace will have one of the following three attributes. First, an obvious, and long-term, dip in performance. Second, a change in fund management. Third, a change in the fund manager. However, we are also continuously on the lookout for better alternatives that merit mention and investment. The first one is obvious enough but the next two need qualifying. When a fund house is sold or when the fund manager changes, typically, if the fund has been doing well, the new fund manager continues with the old portfolio and its (good) effects usually continue for six to eight months. It’s only then that the new fund manager begins to stamp their personality on the fund by making subtle changes. Add another six months to a year to really judge the new fund manager’s portfolio. In the meantime we remove these funds from Mint50. We’ll bring them back if the new manager keeps the performance going.

This round of audit sees three funds churning in Mint50. Two are due to a sale of a fund house and one due to change in fund manager. In March 2012, when L&T Finance Ltd agreed to buy out Fidelity group’s Indian MF business—FIL Fund Management Ltd—we told you the very next day to stop your systematic investment plans (SIPs) with Fidelity. We had also told you to redeem from Fidelity’s schemes, once the exit option starts. Under the rules laid down by the capital market regulator, Securities and Exchange Board of India (Sebi), when a fund house is acquired by another fund house, the acquired fund house has to give an exit option to all its existing investors; a chance to withdraw without paying any exit load. In a notice that it issued on 5 October, Fidelity announced that its exit option period starts from 15 October 2012 and ends on 15 November 2012 (both days including). In this audit, we remove the two Fidelity equity schemes that have been a part of Mint50. The third scheme, Canara Robeco Infrastructure Fund (CRI), which goes out, saw its fund manager leaving the firm.

Three funds enter to take their place. Earlier this year we told you that India’s oldest fund house SBI Funds Management Co. Ltd is getting its act together by changing fund management and processes. Some of its schemes have been resurrected; others appear to be on their way. Two of the three vacant slots in Mint50 get filled by SBI mutual fund’s equity schemes; SBI Magnum Equity Fund (MEF; a large-cap fund) and SBI Magnum Emerging Business Leaders (MEB; a mid-cap-oriented fund). ICICI Prudential Discovery (IPD) takes up our third vacant slot.

What’s in

SBI Magnum Equity Fund: Our large-cap basket, that has an equal measure of actively and passively managed schemes, gets MEF added to it. The scheme is a pure large-cap scheme that invests in large and well managed companies.

Before its present fund manager, R. Srinivasan, took over in May 2009, MEF used to have about 30% of its corpus in mid- and small-sized companies and the rest in large-sized companies. Srinivasan, who changed to a pure large-cap offering, does not aspire for MEF to top the charts. “Our aim is to beat the benchmark index (Nifty) and to beat our category average", he says. “Whatever lets you to go to the very top, if that goes wrong, it will also pull you down miserably", he says. MEF’s rolling returns—a statistical tool to measure consistency—look good over the past six-year period.

MEF tracks its benchmark index, Nifty, closely. At any given point in time, half its portfolio has to exactly replicate its benchmark index. “Such is its mandate, that even if I do not like a particular stock, I have to invest in it in MEF because it lies in the benchmark index", says Srinivasan. This ensures that MEF doesn’t deviate too much from its benchmark’s returns. Srinivasan believes in holding a tight portfolio; with close to 1,000 crore in size, MEF holds about 25 companies. The top 10 accounts for close to 60% of the scheme’s portfolio. Its overweight positions (compared with its benchmark index) in companies such as Coal India Ltd, Bosch Ltd and its underweight stance (compared with its benchmark index) in stocks such as Larsen and Tourbo Ltd and Hindalco Industries Ltd helped the fund in the recent past.

MEB is one of the best schemes in rising markets, but can perform miserably in falling markets. The fund has returned about 37% so far this year, compared with 30% by the category average and CNX Midcap index, each. But MEB underperformed almost all its peers between December 2011 and January 2012 when it gave just 0.36% returns compared with 3.51% by the category average and 6% by Nifty.

Srinivasan manages this fund very aggressively. He aims at stocks that can double in two to three years. The fund’s mandate gives a lot of leeway to the fund manager; he can also invest in large-cap companies. “But the high conviction ideas come only in the mid-cap space where I can demonstrate value by being in that population of stocks where my competitors are not there", he adds.

Typically, MEB doesn’t follow benchmark much nor does it care much about the volatility it brings about. Hence, while the fund house has been averse to gold finance companies, MEB has held on to Muthoot Finance Ltd. In September 2012, it bought enough shares of Cairn India Ltd, afresh for the first time, to make it the scheme’s top scrip, instantly. MEB also has companies such as Shriram City Union Finance Ltd and Spicejet Ltd that you won’t find in many MF portfolios.

ICICI Prudential Discovery Fund: Another mid-cap-oriented scheme, IPD, gets added to Mint50. S. Naren, chief investment officer (CIO), ICICI Prudential Asset Management Co. Ltd managed this fund since its inception till 2011. Since Naren is now the fund house’s CIO, Mrinal Singh manages it now.

IPD follows the value-style of investing; it looks for companies that are out of favour with the rest of the market. That’s one reason why it bought, for instance, Reliance Industries Ltd for the first time ever in 2011; it had never held that scrip between 2004 and 2011. Naren likes companies that show a high dividend yield or cyclical companies when the business cycle is not much in favour or those stocks and sectors not many would like to touch. Since IPD is already close to 2,000 crore, Naren says that the fund will always have a chunk of large-sized companies. “Mid-caps are typically illiquid, so we cannot have a very large-sized mid-cap fund with only mid-cap scrips", he says.

In 2007, IPD suffered because it did not have holdings in infrastructure sector companies on account of its philosophy. But it bounced back strongly in 2009 and 2010 when it came in the top quartile. Its holdings in companies such as Amara Raja Batteries Ltd, Oracle Financial Services Software Ltd, Balkrishna Industries Ltd and Mindtree Ltd helped the fund post good returns in the past three years.

What’s out

L&T Equity Fund (LEF; erstwhile Fidelity Equity Fund): L&T Asset Management Co. Ltd’s track record in equity fund management has been abysmal. At present, none of its equity funds have been rated five stars by Value Research, the MF tracker whose star ratings form the base of Mint50. Returns from L&T Midcap fund (LTM)—one of its two highest-rated schemes—has been unimpressive. L&T Growth Fund (LTG), the other scheme, has done better.

However, things appear to be changing. Recently, L&T AMC announced that Soumendra Nath Lahiri would head its equity fund management team. Ever since it announced that it would acquire Fidelity, L&T AMC has been busy ramping up its fund management team, since as per the acquisition agreement, Fidelity’s equity fund managers will not go to L&T. Its debt fund managers will be a part of the acquisition, though. Lahiri was earlier with Canara Robeco Asset Management Co. Ltd and comes with a good track record.

Though we think that Lahiri would do a good job, we feel it’s better to wait for Lahiri to find his feet at L&T AMC. Ever since he quit DSP BlackRock Investment Managers Ltd in 2008, Lahiri has had short stints in his next three assignments; the last of which was at Canara Robeco AMC as an equity fund manager between April 2011 and September 2012. Lahiri comes with a good track record, though, and should turn around the fund house, eventually. Till such time, we say goodbye to LEF.

L&T Tax Advantage Fund (LTA; erstwhile Fidelity Tax Advantage Fund): The bad news is that existing investors of this scheme don’t have much of a choice, but to stay invested if the lock-in period is still going on. LTA is an equity-linked savings scheme (ELSS) that gives tax deduction benefits that also comes with a three-year lock-in period. As per income-tax rules, investors of ELSS schemes must stay invested for a period of three years. Even if the fund house gets acquired, the exit option doesn’t apply to ELSS investors.

The good news is Lahiri. Hopefully, once the merged entity settles down, LTA’s performance—its 2012 returns have been a measly 23% compared with 25% returned by BSE 200 index—would be back on track.

Canara Robeco Infrastructure Fund: A change of fund manager here is the reason why Canara Robeco Infrastructure Fund (CRI) goes out of Mint50. Its earlier fund manager, Lahiri, has moved to L&T AMC. Ravi Gopalakrishnan, who was earlier with Pramerica Asset Managers Ltd, is now CRI’s new fund manager.

Like his predecessor Lahiri, Gopalakrishnan tells us that he aims to keep CRI as a “pure infrastructure fund" and avoid picking banking stocks, unlike many other infrastructure funds in India. “But I would consider housing finance companies that lend to the infrastructure sector. I would avoid retail banks since they have hardly anything to do with the infrastructure sector", says Gopalakrishnan who reminds us that the scheme is free, though, to invest outside the infrastructure sector up to 25% of the scheme’s portfolio, though. For now, CRI is out of Mint50.

On the red watchlist

PineBridge India Equity Fund (PEF; erstwhile AIG Equity Fund): With a one-year return of just 12% and a three-year return of 7.58%, PEF’s performance has not been satisfactory overall. Though on average, Huzaifa Husain, the fund manager, has done a decent job since he took over the controls in June 2009. Since that time till date, PEF has delivered a return of 13%, compared with 11% by the category average and 7.5% by BSE 200 index. Its holdings in stocks like Jindal Steel & Power Ltd and Indraprastha Gas Ltd have hurt its performance this year. But Husain isn’t worried. “These sectors are influenced by government policies and so to that extent, there is always some amount of uncertainty. But if the companies have a strong balance sheet, we are comfortable holding onto such names. Hence, we don’t typically buy over leveraged companies (companies that borrow too much)," he says. Existing investors must stay invested, but for fresh investments (apart from ongoing SIPs), PEF need not be your first choice. For now, we stick with it.

Reliance Regular Savings Fund–Equity: At the start of the year, we had warned you that the year of 2012 would be crucial for Reliance Regular Savings Fund–Equity (RSF), after a dismal show in its recent past. RSF is back with a bang. With returns of 37% so far in 2012, it has topped the charts. Not only did it did well on the downside when markets fell between January and May, it also rebounded marvellously between May and till date with returns of 25%. RSF remains a risky option that does well in rising markets and, typically, falls hard in bad markets. Existing investors should stay invested, but avoid fresh investments till we are sure its glory days are back.

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