JM Basic's acute portfolio concentration raises its risk quotient making it unsuitable for an investor with relatively conservative risk appetite
LAUNCHED in 1997, JM Basic is mandated to invest mainly in sectors such as energy, petrochemicals, oil & gas, power generation & distribution, electrical equipment supplies, metals and building materials — all of which are considered to be relatively high beta sectors of the economy. These high riskreward sectors have, in fact, turned JM Basic into one of the highly volatile diversified equity schemes of the country today. The schemes' volatility is reflected not only in its performance but also in the assets managed by this scheme, which have been declining despite the markets doing fairly well on the bourses.
Performance:
A brief overview of the fund's performance reflects its volatility quotient. While this fund has done extremely well in the market rallies, it has taken a sound beating in market downturns.
In 2007, for instance, JM Basic was rendered as the top performing scheme in the category of diversified equity schemes with returns as high as 111% annually. This was indeed a remarkable achievement by the fund as it belittled not only the Sensex and the Nifty returns of about 47% and 55%, respectively with healthy margins that year but was also way ahead of its peers which returned an average of about 60% during the period.
It was, in fact, in 2007 when JM Basic saw its assets zoom past Rs 1,000-crore mark from less than Rs 100 crore at the beginning of the same calendar year. Not only did the fund's performance attract new investors but the appreciation in its stock holdings was impressive enough to boost its asset growth like never before. A high exposure in the small and midcap stocks in sectors like engineering, metals and construction may have boosted the fund's performance in the favorable market conditions, but the same turned out to be its downfall in the next year.
In 2008, the net asset value (NAV) of JM Basic Fund collapsed like a pack of cards - down by nearly 76% against the market decline of about 52%. It thus lost out on all its gains of previous year and its rankings declined from top to the bottom of the charts. It proved to be one of the worst performing schemes during the market meltdown.
While the fund did recover most of its lost value during last year's recovery phase, returning about 100% against the Sensex and the Nifty's 81% and 76% gains, respectively last year, its performance in the current calendar year has again be dismal.
Since January this year, JM Basic's NAV has fallen 8.2% against 4-5% gains of the Sensex and Nifty.
Portfolio:
Investing mainly in the basic industries of the economy, JM Basic does have a relatively restrictive investment mandate, confined only to a few selective sectors which make it a risky proposition. However, the fund also has a high stock specific concentration which makes it even more volatile.
Nearly 80% of the equity portfolio is attributed to just about 18 stock holdings, with exposure to each of these holdings being 4-6%. What also raises the fund's risk quotient is the absence of defensive sectors from its portfolio. The fund currently commands a beta of 1.5, which implies that for every 1% rise or fall in the market return, JM Basic's portfolio rises or declines by about 1.5%.
On the sectoral front, JM Basic is currently high on engineering, especially on the construction front and includes stocks like L&T, HCC and IVRCL Infrastructure.
It also has a high exposure to the power generation & distribution space and its stock holdings on this front include Reliance Infrastructure, PTC India, GVK Power & Infra, JSW Energy and Kalpataru Power Transmission.
It is also interesting to see the fund hold just about bare minimum levels of cash at any given point in time. Even in 2008, when most equity mutual fund schemes had considerably increased their cash exposures to protect capital from getting swayed away in the market downturn, JM Basic preferred to increase its exposure in derivatives futures rather than increase cash positions. Currently, however, the fund is fully invested in equities with bare minimum exposure in derivatives.
Our View:
Even if JM Basic has had an impressive track record in the market rallies, its inability to cushion its returns in the downturn dissuades an investment in this fund. Not only this thematic fund has quite an aggressive investment approach, but also its acute portfolio concentration further raises its risk quotient and volatility making it unsuitable for an investor with relatively conservative or moderate risk appetite. Even those with high-risk appetite are advised to be watchful before investing in JM Basic.
