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Have mutual funds passed the test?

Aabhas Pandya

Ask any fund official, the hallmark of a true mutual fund? "One that outperforms both rising and falling markets," pat comes the simple answer. Well, it is easier said than done, as most fund managers would have realised in the last year. We ran a simple check to see how many diversified equity funds actually managed to stick to this dictum in the last two fiscal years, when the Sensex gained 34 per cent between April 1, 1999 and March 31, 2000 while it lost 28 per cent during April 1, 2000 and March 31, 2001.

The results, though hugely disappointing, were not unexpected. Only two funds - Kothari Pioneer Bluechip and Templeton India Growth Fund managed to beat the bellwether benchmark - both on the rise and on the decline. For instance, Kothari Pioneer's Bluechip comprehensively beat the Sensex with a gain of 99 per cent for the one-year ended March 31, 2000. For March 2001, the fund again outperformed the index when it lost only 26.28 per cent.

Further, while as many as 27 funds from the family of 38 diversified equity funds surged past the 30-stock Sensex in 2000, only six funds could beat the index last year. Clearly, it is difficult to outperform in a bearish market. Thus, while most funds rode on the tech wave in late 1999 and early 2000, they were simply blown off when the ICE avalanche hit the market. In other words, most fund managers failed to anticipate the ensuing sharp down in technology stocks.

The reason for this steady performance of a couple of funds is not hard to see. Fund managers, who did beat the Sensex managed because they held on to a diversified portfolio and resisted the temptation to go overboard on tech stocks or any other sectors or stock. For instance, the average tech holding in the top performing equity fund for 2001, Templeton India Growth Fund was only 24 per cent in the last one year.

On the contrary, the big guns of 1999 like Magnum Multiplier Plus, Alliance Equity and Birla Advantage maintained their concentrated investments, with more than 50 per cent of their assets locked in the volatile sector. The one-year decline in these funds reveals that -- ING Growth Portfolio (-75.95%), Magnum Multiplier Plus (-68.85%), Libra Leap (-62.98%), Birla Advantage (-56.91%), IL&FS Growth & Value (-56.12%) and Alliance Equity (-52.44%).

Diversification works since market's preference for sectors rotate. Thus, a few sectors or stocks cannot perpetually dominate investors' preference. Worse, they go out of favour abruptly without giving an opportunity to exit.

Moral of the story - diversify and prosper, else concentrate and suffer!

Riding the highs and lows of the market

One- year performance	As on 31/03/2000		As on 31/03/2001
Funds	Returns (%)	Outperformance (%)	Returns (%)	Outperformance (%)
Kothari Pioneer Bluechip	98.91	65.19	-26.28	1.65
Templeton IGF	89.34	55.61	-17.99	9.94
Sector Average	78.19		-40.62
BSE Sensex	33.73		-27.93

Underperformers

One year performance	As on 31/03/2000		One year performance	As on 31/03/2001
Funds	Returns (%)	Under- performance (%)	Funds	Returns (%)	Under- performance (%)
Zurich India Capital Builder	7.94	-25.79	Magnum Multiplier Plus	-68.85	-40.92
Canglobal	10.96	-22.77	Magnum Equity	-67.49	-39.56
Canbonus	11.92	-21.80	Libra Leap	-62.98	-35.05
Master Plus '91	16.32	-17.40	Magnum Global	-61.77	-33.84
Dhanvikas (1)	18.61	-15.12	Dhansamriddhi	-57.95	-30.02

Source: Value Research

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