Till date, Religare Banking, a large-cap oriented fund, has proved to be a safe, but not exciting player.
It started off well by beating its benchmark — CNX Bank Index, in the initial two quarters. But it faltered in the June 2009 quarter, when it underperformed its benchmark and the category average by a margin of around 20 per cent and 8 per cent, respectively.
A part of the reason could be the delayed move to lower cash. The cash allocation was pretty high in April (20%) which got lowered by June 2009 (5%). However, Kumar feels that it was a combination of the cash allocation as well as the type of stocks. "The initial part of the recovery was with stocks that had fallen hard last year," says Kumar. "They rose sharply just coming off the trough. These were the stocks we were underweight on."
Despite that lapse in performance, the fund has rallied in recent times. Its 1-year performance is pretty average but its 6-month return (as on November 30, 2009) places it in the No. 1 slot amongst its peers. "After the initial recovery, it was other more solid stocks with stronger business models and balance sheets that began to rally," explains Kumar. "That has helped in performance since these were the stocks we owned."
The mandate of this fund states that it will invest primarily (min. 65%) in the stocks of CNX Bank Index with some exposure to financial stocks which are not part of the index (max. 35%). This ensures that the fund tilts towards large caps and currently holds the second-highest market cap amongst its peers. Interestingly, it has never invested in Kotak Mahindra Bank and IDBI Bank.
This fund has never really courted the popular broking stocks but instead holds stocks like ICRA, Power Finance Corporation and Rural Electrification Corporation. "We believe that project finance institutions are well placed to benefit from the infrastructure boom," says Kumar. "Where banks are concerned, there has not been much growth in credit. But in certain financial institutions, which lend to the power sector, there has been growth and their book is clean with lower NPAs." Its turnover ratio at 3.1 signifies a fair amount of churning. "The reason was due to the dividend activity in the year, for which one has to necessarily sell the stocks to realize profit. We don't churn much," says Kumar.
