Larger the company in terms of size and market capitalisation, usually less is the risk associated with volatility and therefore there are funds focussing on this theme. It is also a better option than an index fund since active management will weed out non-performers in quick time.
DSP Merrill Lynch Top 100 Equity Fund, which has given a return of 52.36 per cent since its launch in March 2003, is one such fund. The stated objective of the fund is to give capital growth by investing in top 100 listed companies by market capitalisation through a portfolio with a target allocation of 90 per cent to 100 per cent in equity and up to 10 per cent in debt and money market instruments.
The fund has given a return of 52.36 per cent since inception as against the benchmark of BSE 100 Index, which posted a return of 42.92 per cent. In the last three-year and one-year horizon it posted annualised returns of 36.35 per cent and 14.93 per cent as compared with 30.91 per cent and 11.70 per cent gains recorded by the benchmark BSE 100 Index over the comparable period. Over the year, the scheme has outperformed most of its peers as well. In the past one year and six months it posted returns of 9.89 per cent and 8.76 per cent respectively, well above the category median. The fund also has registered a beta of 0.94 (a measure of how volatile the returns are), which is more or less in line with the peer group median. Its assets under management also have grown to Rs 3274.82 crore as at March 2007 from the previous year's level of Rs 1574.09 crore.
The fund has maintained a well diversified portfolio. It has invested in around 15 sectors and spread over 35 to 40 stocks. Taking a look at the fund portfolio, Reliance Industries, Tata Consultancy Services, Zee Telefilms, State Bank of India and L&T are the top five holdings, which contribute 25.24 per cent of the total portfolio as of March 31, 2007. The top five sectors in which the fund has parked its money during the month of March are software, petroleum products, consumer non-durables, industrial capital goods and banks contributing 44.15 per cent of the overall portfolio.
The fund has increased its investment in petroleum products and consumer non-durables from 4.87 per cent and 5.71 per cent respectively in February 2007 to 11.24 per cent and 7.13 per cent respectively in March 2007. On the other hand it has reduced its exposure in bank, software and industrial capital goods sectors. Out of these, the maximum reduction was in industrial capital goods in which the fund has reduced exposure from 12.76 per cent in February to 6.89 per cent in March 2007.
When queried by Myiris on the portfolio churn, Apoorva Shah, fund manger said, “One reason for the reduced exposure across these and other sectors has been the anticipated volatility and the need to raise cash. The reduction in weightage is more tactical rather than due to any strong fundamental weakness in these sectors. However, we are somewhat cautious on the interest rate sensitive sectors in the short run.”
A lot of movement in the portfolio can be seen in the month of March 2007. It has entered into 10 new stocks and exited from 12 stocks. The fund has added Ambuja Cements, Hindustan Petroleum Corporation, Bharat Petroleum Corporation where as Satyam Computer, BHEL, HCL are some of the few stocks from which it has exited.
The fund was holding around 11.78 per cent in banking stocks and 3.02 per cent in finance stocks. The increase in CRR, Repo rate and increase in the interest rates look to have made the fund to reduce its holding in banking stocks and finance stocks to 6.13 per cent and 1.62 per cent respectively in March 2007. In February 2007, when the market was awaiting the budget’s outcome, the fund was sitting on cash of 13.78 per cent as compared with 2.71 per cent in March 2007.
The fund manager says, “We are typically fully invested with 3 to 5 per cent cash. However, in times of volatility, we may increase the cash level to 10 per cent or so. We pick stocks on a bottom up and top down approach and combine value and growth investment styles.” He goes on to add, “This would be a good time for investors to re-assess their overall asset allocation. While equities as an asset class continue to look positive in the long run, we do expect more volatility this year. The interest rate scenario is also likely to remain firm for the better part of the year.”