3 equity funds you shouldn’t give up on...

From Jan 2014 through June 2014, the S&P BSE Sensex has risen by 20%, while the CNX Midcap index has appreciated by 37%. As with every market upturn, this time around too, the performance of equity funds has come under the scanner. There are several articles doing the rounds, detailing which equity funds and fund categories have fared the best. Keeping with the norm, the investing community has yet again displayed little tolerance for funds that have failed to make the most of rising markets. As a result, funds that have underperformed (relative to peers and/or benchmark indices) are being vociferously scorned.

I thought it will be interesting to focus on 3 equity funds that haven’t had an impressive run thus far, but continue to be strong offerings, nonetheless. To be clear—I’m not suggesting that six months is an adequate time period for evaluating equity funds; neither is that a recommended investment horizon.

However, the fact remains that there is a lot of short-term oriented advice and views doing the rounds. Investors can and do get influenced by such erroneous advice. If anything, this commentary is intended at refuting such short-term views. Here’s a checklist of 3 equity funds that investors shouldn’t give up on.

1. Franklin India Bluechip Fund

It has been a tough ride for the fund, thus far in 2014. On a year-to-date (YTD) basis ending June 2014, the fund (up 21%) has marginally outscored its benchmark index (S&P BSE Sensex) by one percentage point. In a peer-relative sense (i.e. versus large-cap funds), the performance has been found wanting. Here’s why: to begin with, manager Anand Radhakrishnan adheres to the fund’s large-cap nature far more stringently than the category norm; in the present market upturn, small/mid-caps have outscored their large-cap peers. Also, the manager’s top-picks Infosys and Bharti Airtel have detracted from the fund’s performance.

Why you should keep the faith:      

The fund has all the makings of a top-notch offering. Supported by an accomplished investment team, Anand ranks among the best portfolio managers in the country. The investment process is robust—research-driven with an unwavering focus on quality and reasonably valued stocks. The benchmark-agnostic approach coupled with willingness to trade-off short-term pain for long-term gains, only further accentuates the likelihood of a divergent showing versus the norm, in the near-term. However, over the long-haul, the fund remains ably equipped to reward investors. Finally, it helps that the fund is backed by one of best fund companies in the country.

2. DSP BlackRock Small and Mid Cap Fund

Manager Apoorva Shah hasn’t had the best of times in the recent past. In 2013, funds helmed by him had an eminently forgettable year; among other reasons, Shah’s bet on a macroeconomic turnaround didn’t quite come off. As for this fund in particular, despite having bested its benchmark (CNX Midcap) both in 2013 and thus far in 2014, it has failed to match the showing clocked by a typical small/mid-cap peer. In the Jan 2014-June 2014 period, Shah’s investments in a motley mix of stocks such as IPCA Labs, Persistent Systems and Britannia Industries have held back the fund.       

Why you should keep the faith:     

Not many managers can match Shah when it comes to skilfully combining fundamental factors (such as an in-depth understanding of stocks) with elements such as market sentiment and news flow. The investment process though not robust in the conventional sense, is certainly workable. It helps that the manager is at home with the process, and executes it with skill. Over the years, Shah has displayed the ability to rapidly realign the portfolio and recover lost ground. Another factor in the fund’s favour is the fund house which ranks among the better ones in the industry. All in all, the fund continues to be a strong long-term bet.

3. SBI Magnum Global Fund

A cursory glance at this fund’s recent performance might lead one to believe that manager R. Srinivasan has lost his touch. YTD ending June 2014, the fund has appreciated by 31%, and underperformed the S&P BSE Midcap index by nine percentage points; on the peer-relative parameter, the fund fares even worse. Interestingly, while the manager’s top-picks have by and large fared well, select holdings from the financial services, media and health care sectors have taken away from the fund’s showing.

Why you should keep the faith:     

In the small/mid-cap segment, few managers can hold a candle to Srinivasan. The manager relies on intensive research to ferret out growth stocks. The emphasis on business competencies further underpins the process. Over the years, he has displayed an uncanny ability to pick winners ahead of the curve. Another positive is Srinivasan’s willingness to back his conviction bets, and adhere to the fund’s small/mid-cap nature. At an asset size of INR 10.7 billion (as of June 2014), capacity—a typical area of concern in small/mid-cap funds—isn’t a worrying aspect as yet. The fund’s long-term credentials remain untarnished.

On a concluding note, just as near-term underperformance doesn’t dent an inherently strong fund’s long-term prospects, a strong showing clocked by a mediocre fund on the back of rising markets, doesn’t enhance its long-term prospects either. Be wary of such short-term wonders.

Data Source: Websites of fund companies, www.bseindia.com, www.nseindia.com

Why Union Budget 2014-15 isn’t bad for the mutual fund industry

Union Budget 2014-15 has produced its share of diverse reactions. On Budget day, equity markets were at their volatile best. While bigwigs from opposition parties slammed the Budget, industry leaders hailed it. Diverging opinions notwithstanding, one area where consensus has emerged is that the mutual fund industry and investors have been done in by the Finance Minister (FM).

Proposals pertaining to long-term capital gains on non-equity oriented funds (read debt mutual funds) and dividend distribution tax (DDT) are being seen as spoilers. To be fair, a higher tax liability does hurt and negative reactions aren’t surprising. But to suggest that these provisions will spell doom for the mutual fund industry is far-fetched. Debt fund segments such as liquid funds and fixed maturity plans (FMPs) which account for a significant size (roughly 41% as of June 2014*) of industry assets are likely to be most affected by the aforementioned provisions. The theory doing the rounds is that the stringent tax provisions will result in investors shunning these segments in favour of bank fixed deposits.

What critics need to consider is—was the tax arbitrage (versus avenues such as bank fixed deposits) their only draw? To my mind, debt funds operate on the premise of offering market-linked returns and high liquidity at low risk. Critics will argue that higher tax will result in lower post-tax returns. That’s where the mutual fund industry needs to step up to the plate. To begin with, fund houses can make debt funds inexpensive by lowering costs. Then, there’s scope for paying more attention to the investment management function.

For instance, it is an open secret that most FMPs operate on an auto-pilot mode with minimal intervention from portfolio managers. To be fair to portfolio managers, given the large number of FMPs that a typical fund house launches, there isn’t any alternative but to treat them as mass-produced commodities. But a modified approach, wherein the number of FMP launches is rationalized, managers invest more time and effort, coupled with competitive costs, will keep the segment competitive even in the new regime. It would be safe to assume that better returns will translate into investor interest and asset flows

A constant rhetoric from fund houses is that individual investors should use liquid funds (roughly 22% of industry assets as of June 2014*) as an alternative to savings bank accounts. However, it is an indisputable fact that liquid funds continue to be a domain for corporate and institutional investors (as of March 2014, 88% of assets in liquid funds were held by corporates and institutions*). Why the skewed holding pattern? It’s simple: corporates and institutions represent a ready clientele which will bring in big monies, so fund houses are happy to cater to them.  

Conversely, tapping into retail monies is an arduous task. To begin with, retail investors will have to be educated and sold the idea of investing in liquid funds. Also a smaller ticket size means that fund houses will have to reach out to a large number of retail investors. But is it realistically possible for fund houses to become more retail-oriented? Yes, it is, and here’s how: fund houses will help their own cause by making sensible and honest use of the mandated investor education monies rather than plastering cities with surrogate advertisements under the garb of investor education. In the long-term, fund houses must reduce their unhealthy reliance on corporates for assets.

Speaking of long-term, here’s something to cheer about. Most seem to have overlooked that the limit for tax-saving under Section 80C has been enhanced to Rs 150,000. Equity Linked Savings Schemes (ELSS) from mutual funds are eligible for tax sops under Section 80C. The interesting bit is that these are equity funds (on which fund houses typically make more money versus debt funds); additionally the investments are subject to a 3-year lock-in from the investment date (read sticky long-term money). For cynics who believe that ELSS will become a thing of the past when the long-awaited direct tax code arrives, wait and watch! All recommendations of the erstwhile FM may not find place in the new direct tax code.

The Budget highlights mention “uniform tax treatment for pension fund and mutual fund linked retirement plan”. In a February 2014 press release, market regulator SEBI alluded to the mutual fund linked retirement plan. It would be safe to assume that guidelines for such products will be issued shortly and that mutual funds will be able to attract retail long-term monies from such products too. Comparable tax treatment with similar products from the insurance industry only further sweetens the deal.

To my mind, the Budget has done enough to facilitate flow of long-term monies into mutual funds. The onus to make most of the opportunity on hand lies with the mutual fund industry.

On a related but distinct note, five years ago, around the same time, SEBI abolished entry loads on mutual funds. Even then naysayers had predicted that the mutual fund industry was doomed. Guess what, it’s still up and running. Likewise even now, it would be best to take those predictions of penal tax provisions seriously hurting the industry with a pinch of salt.

* Data sourced from www.amfiindia.com

Investment lessons from Rocky Balboa

Years ago, when I first saw “Rocky”, I was hooked onto it immediately. Since then I have watched the entire series umpteen times, and it has never failed to impress. While few would dispute the entertainment (remember I am a fan), the Rocky fable also offers some handy investment lessons. Read on.

It's about how hard you can get hit and keep moving forward

At its core, the Rocky saga is a tribute to the indomitable human spirit. That makes it the greatest underdog story of all times. Let’s not forget that Rocky is a boxer who is on the wrong side of age with a bad eyesight. But what he lacks in physical attributes, he more than makes up for in determination. To quote Adrian: “All those fighters you beat, you beat them with heart not muscle”.

Likewise while investing, it is undeniably important to be well-informed of the nitty-gritties of the economic environment, market conditions and investment avenues. But alongside the aforementioned, investors must also possess the ability to be resilient at all times. For instance, they should succumb neither to temptation (take on undue risk to make a quick buck in frothy markets), nor to panic (in down markets when fundamentally robust investments are trading in the red). Investors who can detach themselves from the noise in the markets and resolutely stay the course are often best placed to succeed over the long-haul.

Nobody's ever gone the distance with Creed. All I wanna do is go the distance

Throughout his boxing career, Rocky is unambiguously aware of his goal. Also, his unwavering focus and willingness to do all it takes to achieve the goal are noteworthy. For instance, when he first goes up against Apollo Creed, he simply wants to last the entire match, but in the rematch he focuses on beating Creed. Against Clubber Lang, it’s about regaining his confidence and the title. For taking on Ivan Drago, Rocky choses to train in testing conditions in Russia.

At the risk of using a cliché, investing without a goal is a bit like a journey without a destination; you never know where you will land up. Before investing, investors must decide what their goals are i.e. what they intend to accomplish and how much monies are require for the same. This in turn will help them figure out their investment horizon, avenues to consider and even the sum of money to be invested. Having pre-set goals also helps evaluate if investments are panning out as expected, and if not, corrective action can be taken.

Because I’m a fighter. That’s the way I’m made

In the Rocky series, the protagonist dabbles in vocations ranging from a thug for a loan shark, trainer to a restaurateur. However his true calling is to be a boxer and that’s where he is at his best. This is a classic example of identifying one’s true self and then sticking to it.

On their part, individuals must identify what kind of investors they are. They should find out how much risk they can take i.e. are they fine with risking money invested in a trade-off for higher-than-average returns? Or, do they put a premium on preserving capital, even if it means foregoing returns? Likewise, investors should try to determine if they are comfortable trading around, or is a long-term oriented buy-and-hold approach more apt for them? Such insight into their psyche will aid investors devise an investment philosophy that they are most comfortable with. It is no less important for investors to consistently adhere to their philosophy.

I wanna thank Mickey for training me

Admittedly it’s Rocky who wins all those glorious bouts in the ring, but he is always backed by a strong team. To begin with, he is mentored and trained by Mickey; subsequently it’s Creed and Duke who take on training duties. Let’s not forget that Adrian and Paulie are omnipresent in Rocky’s corner. Simply put, it pays to have a strong team.

There’s a plethora of investment advisers and financial planners who can help investors manage their monies. Then there are investment-focused publications and websites which can also aid investors. Investors would do well to make the most of the available resources. Expectedly, investors must ensure that the chosen adviser is competent, experienced, has a proven track record and always acts in their best interests. Likewise, before relying on a website or publication, investors must verify its credibility.

It ain’t over till it's over

In his career Rocky goes up against some formidable opponents–Creed, Lang, Drago, and Mason Dixon to name a few. Have you noticed how each opponent is more fearsome than the previous? Sure, Rocky does beat most of them, but nonetheless, each time a new opponent shows up, and the Rocky saga continues.

It's no different with investments. The investment process never comes to an end, not even for investors who may have an ideal portfolio in place. Factors such as changing market conditions, and investors’ needs and finances necessitate a constant review of the portfolio. For instance, often when one need is fulfilled, a new one crops up. At times, existing needs change with passage of time. Hence, investors must understand that investing is not a one-off activity, rather it’s an ongoing activity that they must devote adequate time to.