Reliance Equity Opportunities fund has thrown up some interesting numbers, but we advise you against making it a core holding
Talk about giving the fund manager a free hand - this one's mandate certainly offers that.
The fund manager has the leeway to invest in domestic companies as well as stocks listed outside India. In fact, he can go up to 90 per cent in the latter. There is no sector bias, nor any market capitalisation tilt limiting him. He can buy debt and cash equivalents up to 25 per cent of the portfolio. Simply put, nothing hinders the fund manager from taking opportunistic bets in any form.
Last year, this one made a mark. In terms of annual performance, it stood at 19 (out of 214 diversified equity funds). However, its track record is spotty. Launched in 2005, it started off on a good note and went on to be a top quartile performer in 2006. But in the next two years it failed to impress and underperformed even its own benchmark and the multi-cap category average.
When the market began to rally in March 2009, the fund had around 85 per cent of the portfolio in equity. It did not appear that the fund manager was convinced about the rally as it was only in June that the exposure began to get seriously hiked upwards of 90 per cent. "Markets started consolidating for sometime during the period and we were in the process of constructing portfolio for the changed environment. It was more a question of the right stocks to buy rather than buying at a specific level," says fund manager Sailesh Bhan.
So it was not surprising to see an underperformance in the June quarter, vis-à-vis the benchmark. But the fund manager made up for this lag in the second half the year and has been steamrolling ahead since then. Its return of 109 per cent for 2009 put it ahead of the its benchmark, the BSE 100 (85%) as well as ahead of the multi-cap category (84.56%). As on July 31, 2010, its year-to-date gains stood at 16.94 per cent, 13.40 percentage points higher than its benchmark for the same period.
Currently, the top three sectors of the fund are Services (16.56%), Healthcare (12.90%) and Technology (11.06%), not the most conventional sector bets. If one digs deeper, the selection of stocks is as interesting. In Services, the fund has invested in Retail (Trent, Shoppers Stop), Travel & Tourism (Cox & Kings), Publishing (Hindustan Media Ventures), and Media & Entertainment (Dish TV). "When picking stocks, we look more into established business models. We also consider companies that are capital efficient or can demonstrate that in the next few years," says Bhan.
Nevertheless, Bhan does shun the conventional fare. Seven out of the 18 core stocks have each been held by a maximum five funds of the same category. On an average, over the past year, it has been noticed that almost half the portfolio is into such stocks. Unichem Laboratories, Hinduja Ventures, Piramal Life Sciences and Micro Inks are some of the picks that no other fund in the same category has any stake in.
Bhan attempts to combine the buy-and-hold strategy with some amount of churning. "Most of the stocks have been there for around 2-3 years. The proportion of holdings though may change," he says. Over the past year, his favorite stocks (highest average allocation) have been Divi's Laboratories (5.34%), Aventis Pharma(5%) and Micro Inks(4.80%), while all-time favourites (stocks held since launch) State Bank of India, Reliance Industries and HCL Technologies had more subdued allocations.
Even in other areas, Bhan does take the path less trodden. During the crash of 2008, he went against the herd and bought small-cap stocks. The fund's average allocation to small caps in 2007 was just 9.33 per cent. In 2008 it jumped to 19.14 per cent. The move paid off handsomely in 2009 when mid- and small-cap stocks rallied. Last year, he averaged a 25 per cent exposure to small caps and still maintains it around that level.
The fund started off with a large-cap bent but has moved more towards smaller companies. This does give it a risky tilt when compared to other equity diversified funds. Bhan begs to differ. "Just because we invest in mid- or small-cap companies does not make it inherently more risky. If you compare it with other pure mid- and small-cap funds, Reliance Equity Opportunities has a lower risk as it even invests in large-cap companies and blue chips, something you will not find in a pure mid or small cap fund," he says.
Nevertheless, we are of the opinion that this fund should not be a core holding in any portfolio. It can be an add-on to generate some alpha. Due to the very nature of its picks, it will not outperform in certain market scenarios, 2007 being a case in point. "2007 was a one-way market, where there was little respect in the market for fundamentals like valuations, quality of portfolios and diversification. We stuck to our mandate to give good risk-adjusted portfolio creation with a high quality diversified portfolio," says Bhan.
If you buy into such a fund, hang on till the bets play out.
