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Mutual Fund Review: AIG India Equity

 

Though its start was not at all impressive, AIG India Equity is beginning to get noticed and now shows potential

 

Though around for just two years, if one looks at its performance, there is a clear demarcation. In all its six quarters till December 2008, the fund underperformed its category average every time, barring one quarter where it equalled it. It began to put its best foot forward only from 2009. In all the five quarters since then, it has outperformed. Further, if one takes a look at the portfolio, another clear cut distinction emerges in June 2009. Here the transformation was the result of Huzaifa Husain replacing earlier fund manager Tushar Pradhan.Husain wasted no time in significantly revamping the portfolio. Fourteen stocks were offloaded which never made an appearance after that (barring HDFC) and 19 new entrants featured. The portfolio reshuffle was based on the premise that domestic recovery would be stronger than global recovery. Hence, stocks dependent on global economic cycles, such as commodities, were given less attention as the focus shifted to domestic stocks, especially in the consumption and investment space.

 

This resulted in a dramatic alteration of the sector allocations. Energy saw its allocation move from 15.26 per cent (May 2009) to 2 per cent (June 2009) with RIL and ONGC exiting. "This was based on our view that global recovery, on which oil price movement is dependent, was weaker than domestic recovery. Also, the under-utilisation of energy producing infrastructure globally was a concern as this has a negative impact on margins. Hence, we decided to avoid the sector," Husain explains. Increased allocation to Auto took place on the back of Hero Honda. Exposure to Services also began to rise.

 

Another significant change was in the market cap tilt. Allocation to large caps was lowered by 15 per cent and small caps by 7 per cent. Mid caps began to corner 46 per cent of the portfolio. Since then the fund has tilted towards mid caps with a decent exposure to large caps. As mid- and small-cap stocks rallied in 2009, the lowering of the large-cap exposure helped.

 

The fund has completely exited Healthcare and Communications. Currently, the top sectors of the fund are Auto, Services and Metals while the top three of its peer-set are Financials, Energy and Technology. This throws up the question of whether Husain is by nature a contrarian investor and a top-down one at that. But his demeanour indicates that he is totally against such branding. In his case, the sector allocations are simply a result of the process of bottom-up stock picking, which he swears by. "No active sector allocations are done. Typically, we may invest in one or two companies in any sector but we then take a big position once we are convinced of the stock. This individual stock allocation perhaps, at times, makes it look like a sectoral allocation. For example, the weightage of Media in the index is very small but if we like a particular stock, our allocation can be significant and, thereby, the sectoral allocation looks large."

 

His underweight stance in Infotech was probably a drag on last year's performance and the increased allocation this year is noticeable, especially since it is on two stocks. But going in line with how he describes his investing stance, he says it is not a sector bet. "This is a call on investing in companies which have either strong execution abilities or a good product and can gain market share profitably," he says.

 

This is a fund that would probably complement the other equity diversified funds in your portfolio. Unlike others, there is no Reliance Industries, ICICI Bank, HDFC Bank or Axis Bank as the top five holdings. The fund manager tries to generate out-performance by investing in select few quality picks, not by investing in risky small caps. So though the portfolio is a bit compact at around 26, it would be wrong to classify it as aggressive. In fact, when talking of his stock selection process, Husain does have a more cautious slant. "We prefer companies with conservative accounting policies. This typically reduces near term profits but provides consistency in profits which are rewarded by the market in the long term. Among our top 10 stocks for example, at least four of them have much faster depreciation policies than their peers," he says.

 

By and large, Husain managed to impress in 2009, despite managing the fund for just around half the year. While it can be debated that the timing of his takeover helped, since the rally began in March 2009, there is no arguing with the numbers. Thanks to the changes that he implemented, its 1-year performance (April 30, 2010) speaks wonders; a return of 78 per cent (ranked 7 out of 69) while the category average stands at 64 per cent.

 

While the change at the helm looks promising, one would have to see how he performs in a downturn. But we are willing to go with the view that this fund is in safe hands.

 

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