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'Diversified equity funds must broadbase portfolios'

Aabhas Pandya

The slump in equity prices earlier this week has exposed the ugly side of replicating portfolios and sectoral allocations for delivering handsome returns.

Despite dedicated technology and software funds, asset management companies, or AMCs, have maintained a very high exposure to infotech, communications, and entertainment, or ICE, stocks in their diversified equity funds and saw their NAVs drop sharply during the relentless decline on technology counters.

Of the ten AMCs with 100 per cent technology funds, their diversified equity funds have an average exposure of 60 per cent to ICE stocks.

Thus, while the category of diversified equity funds has lost 26 per cent in the recent market slide, these ten funds with overweight on technology have lost 30 per cent.

If you were an investor in Tata IT Fund, you would have seen your investments erode by 30.82 per cent in the one month between March 7 and April 6.

On the other hand, had you invested in Tata Pure Equity Fund to diversify your sectoral allocations, you would have lost 28.73 per cent. This translates into a difference of only 2.09 per cent over a one-month period.

In the case of Alliance New Millennium and Alliance Equity, the depreciation of investments in one-month period would have been 41 per cent and 35 per cent, respectively - a difference of only Rs 60 on an investment of Rs 1000 in each of the funds.

No wonder, the two diversified equity funds are marginally trailing their tech-specific funds. While Tata Pure Equity has a 67 per cent exposure to infotech and telecom, ICE stocks carry a 64 per cent weightage in Alliance Equity as on February 29, 2000.

Clearly, these two and several other 'diversified' equity funds need to broadbase their existing portfolios.

For instance, Birla Advantage, the flagship equity fund of Birla Mutual Fund, has allocated 78 per cent of its assets to the ICE stocks even as it has Birla IT Fund in its stable.

The other instance is that of IL&FS Growth and Value Fund (61 per cent invested in ICE), even though the AMC now has IL&FS e-COM fund.

Even AMCs like Kotak Mahindra, DSP Merrill Lynch and Sun F&C now need to prune the exposure of their equity funds to these highly volatile stocks since these AMCs now have funds dedicated to the technology sector.

Among the diversified equity funds, Kothari Pioneer Bluechip has seen its NAV go down by only 17.75 per cent in the one-month compared to a 36.42 per cent slide in KP information technology fund.

Surely, there cannot be a similar risk-return profile for two funds under the same AMC. While investors have to estimate their appetite for risk, AMCs also have their task cut out.

They have to set apart the risk averse from the risk bearing investor and sell them the ideal funds accordingly.

Source: Value Research

Mutual Funds

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