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Best Funds 2008

Use the annual OLM star rating and the OLM 50 to build your own unique portfolio
Kayezad E. Adajania with Sunita Abraham
11 Apr 2008

Theres a lot of clutter out there in the mutual funds (MF) industry in India. At the first level, there is clutter in what you can buy. At present, you
can choose from more than 2,000 schemes from 32 companies, many of them close cousins of each other. Then, at the next level, there are
numerous rankings and ratings of mutual funds, each claiming to tell you which are the hottest mutual fund rock stars. The problem is most of
them do not agree with each other. Faced with these, how do you choose which scheme to buy into or, even, which of your mutual funds to stay
invested in, or throw out of your portfolio?
When you look at any rating based on performance, after adjusting for risk, what you get is a report card of the various schemes in the market. It
is like the end-of-the-year report card that your child has brought home recently to show how he has done in the year just gone by. But does it
show his consistency or how he will do in the future? And that is where most of the ranking systems currently in use in India fail. They throw up
the latest winners with little bearing on either consistency of performance or future prospects.
Click Here for Equity Diversified.pdf
We hope to address both the issues of consistency and future performance by introducing two new tools that you can usethe Consistency
Circle and The OLM 50.

But first, more about our annual rating. There is a reason why we use the star rating system and do not depend purely on the ranks. Past
performance of a fund is not a guarantee for future returns. That is why the No.1 scheme this year, may not be the topper next year. Also, there
would, in all likelihood, be very little to differentiate between schemes, say, ranked No. 7 and No. 8. So, Outlook Money assigns stars to all the
schemes that made the cut this year, with five stars being the highest rating and one star being the lowest. Each rating denotes a slab; the
greater the number of stars, the better it is. Instead of fixating on the exact position of your scheme in the rankings, watch out for your schemes
star rating. What this means is that dont watch for No. 1 or No. 2, since no scheme can remain at the top of the charts consistently over, say, 10
years. Instead look at the star ratings. Any scheme that gets four or five stars has done well.
Now, if you look at the tables on these pages, you will see the Consistency Circle in the last four columns. This is a tool that will tell you at a
glance how a particular scheme has fared in the OLM Star Ratings in the past years and its current star status. If you see the number of dots
falling over the years, the scheme is losing steam. If the number is increasing, performance is getting better. Of course, we like those with
consistent four or five dots over the years.

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So now you know the past. What of the future? Is a five-star rated fund, for instance, poised to do well in the future too? What if the conditions
have changed for such a fund and we no longer have the confidence in it, despite the fund having done so well so far? Enter OLM 50. This is a
basket of schemes that contains all the five and four star-rated funds that Outlook Money feels should do well over a period of time. The final
choice has its roots in the ratings, but we put our knowledge of the industry and fund houses to make a judgement on which schemes to include
in the portfolio. This is not to say that all 50 should be in your portfolio. It is more like an investing universe from which you can mix and match to
create your own unique bouquet.

Notice that we are including four schemes that did not feature in the rating process on account of the lack of historywe only consider schemes
with a three year track record. However, there are schemes that have just missed this by a whisker, are doing well and merit a place on the
OLM 50 portfolio. You will find out more about these schemes in the Emerging Funds story on page 54.
And now, let the games begin. Allow us to introduce you to the winners of 2008.
I. EQUITY
If mid-cap stocks were a little subdued in 2006, they were quite volatile in 2007 as the shocks of the US sub-prime crises reached the Indian
stockmarket and the MFs felt them too. In 2007, downside risks for diversified equity funds was, on an average, higher than that of the previous
year, even after segregating mid-cap funds from the diversified ones. On a one-year basis, mid-caps outperformed large-caps. The CNX Midcap
index, for instance, returned 77.8 per cent compared to the Niftys 53.2 per cent. But the tilt was towards large-caps. In the schemes that made
it to the list this year, average mid-cap exposure was down to 33 per cent compared to 41 per cent in 2006.
EQUITY-DIVERSIFIED
Our topper in the diversified equity category, SBI Magnum Contra Fund (SMC), has the best three-year rolling return in the category and earned
five stars for the fourth year running.

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There is a little secret here. While the name suggests that it is a contrarian fund, it is by and large managed as a diversified equity fund. With
smart tweaks to the term contrarian, SMC now captures the length and the breadth of the market. So, unlike a typical contrarian fund that guns
for out-of-flavour stocks, SMC considers the underlying companys valuations and compares that with what it believes the companys true
valuations should be and then takes a call whether to invest in it or not. Its fund manager, Pankaj Gupta, says: If the market expects a stock to
grow by 20 per cent, but we expect it to grow by 30 per cent, the scrip is a contrarian pick for us.
SMC loaded its portfolio with high-growth stocks like Jaiprakash Associates, Sintex and Welspun Gujarat Stahl Rohren throughout 2007, to the
funds eventual benefit. In fact, SMC kept a high exposure to the capital goods sector, one of the hottest in 2007. Gupta justifies this by claiming
that infrastructure and engineering sectors were the top-performing sectors for the past 2-3 years and, therefore, many felt that they were quite
overheated. Hence, SMC took a contrarian view and remained invested in them as the MF felt there was still steam left.

However, the fund does play on genuine contra bets too. It invested in Tata Steel after it acquired the Anglo-Dutch steel company Corus despite
markets shunning it. It increased its exposure to interest-rate sensitive sectors such as auto and banking, a move that eventually benefited the
fund in 2007. Interest rates have almost peaked. These sectors are poised to gain when they start declining, adds Gupta.
HDFC Equity Fund (HEF) came in second after SMC. Although HEF did not have such a hot 2007, it returned just 53.25 per cent as against a
category average of 57.61 per cent. There are two reasons why HEF still got a high rating. One, it falls less than its peers when the market turns
down. Its downside risk for the past one and three years is also far less than that of the category average. Two, simply put, Prashant Jain. This
star fund manager of HEF has been the schemes sole manager for the past decade. In 2007, Jain reduced exposures to sectors like capital
goods and housing & construction because he felt these sectors were quite overvalued.

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Though Jain was right in his belief, markets chose to continue chasing these sectors and HEF suffered in the interim. In 2007, nobody looked
at cash flows; real estate was the buzzword everywhere. But we stand vindicated now, says Jain referring to the early 2008 crash in the equity
market. HEF has been able to check its fall at 29.61 per cent compared with a category average of 32 per cent.
At a corpus of Rs 4,683 crore, HEF is Indias largest diversified equity fund today. From a 20-stock fund a few years ago, it now holds around
45-50. When markets swell, we have to reduce the risk by diversifying into a large number of companies. But when markets correct, we can be
comparatively more confident of our picks and, therefore, afford to hold a concentrated portfolio, says Jain. But does a large size bother him?
No, he asserts. With a large-cap focus and a larger overall market now, he anticipates no problem.
OLM was spot on in recommending Kotak Opportunities Fund (Jack Of All Market Caps, 31 December 2007), as the fund debuts on our charts
with a 4-star rating. Two schemes that did exceedingly well in 2007, Taurus Discovery Stock and Taurus Starshare (one-year returns of 99.95
per cent and 86.78 per cent, respectively) finished at the bottom because of a high scrip concentration. It was a bad year for Birla Sun Life Buy
India Fund, which fell to 3-stars from 5-stars a year back on account of a high exposure to pharmaceuticals and fast moving consumer goods
sectors (FMCG), two sectors that didnt do particularly well last year.
EQUITY-LARGE-CAPS
Birla SunLife Frontline Equity Fund (BFE) tops the charts in the large-cap space. Returns rose from 49 per cent in 2006, to 61.83 per cent in
2007 on the back of a run-up of large-cap stocks.
The resurgence of Birla MF can be clearly seen in this years standings. Because of its renewed focus on research, out of its 14 equity funds
that made the cut this year, all except one earned at least three stars. A. Balasubramanian, who used to earlier head the funds fixed income
team, now heads the overall investment team. He has sharpened the internal processes, stressing on medium and small companies that are
usually under-researched. Analysts and fund managers also have the freedom to present their stock ideas.
BFE invests at least 60 per cent in large-cap scrips and the rest in small and mid-cap companies. Since large-cap scrips are well-researched by
almost every one on the street, fund manager Mahesh Patils astute stock and sector selection ability was key to BEFs success. It did well to
identify potential winners in public sector banks, as also companies like Crompton Greaves, Hindustan Dorr-Oliver and Thermax in 2007.
It is fairly aggressive in stock picking. Says Patil: If price levels are attractive, I dont mind making changes in the portfolio. We follow a bottomup stock picking strategy. But he does not take a high exposure to any single sector. So BFEs downside riska key factor in our rankingsis

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the lowest among all large-cap funds that made the cut.
The story isnt much different for the scheme that stood second. After eking 48.1 per cent returns in 2006, the resurgence of large-caps was
partly responsible for DSP Merrill Lynch Top 100 Equitys (DT100) good run last year as its returns were 64.48 per cent. This fund, which aims
to invest in the top 100 companies by market cap, is actively managed. A look at its past 12 month-ending portfolios reveals a lot of action for a
large-cap fund. Fund manager Anup Maheshwari says: We want to optimise as much as possible and so took some active calls. Not only did
DT100 do well in rising markets, it also limited its slide during the fall.
Remember Franklin India Bluechip Fund? This once upon a time star fund continues to languish with a 3-star rating and could salvage some of
its lost pride because of
low volatility.

EQUITY-MID- AND SMALL-CAP

As volatility rose in 2007, the return gap between large- and mid-cap funds narrowed. For the second straight year, Sundaram BNP Paribas
Select Midcap Fund (SSM) earned a 5-star rating and topped the category. After suffering heavily during mid-2006 to mid-2007, it used the rest
of the year to clean up. It got itself a new fund manager in Satish Ramanathan, who came from Franklin Templeton.
Ramanathan cut cash holding to 10 per cent from 22.6 per cent earlier. He also pared the portfolio from 100-plus stocks to around 80. To soak
up the larger corpus, allocation to large-caps was increased without losing its mid-cap focus. We go for a mix of growth and value stocks in our
portfolio, but try to maintain our liquidity as much as possible because of the funds size, says Ramanathan.
Despite a middling 2007, SSM topped the charts mainly because we consider the funds long-term track record of three years. A stupendous
run from 2005 to mid-2006 makes the funds three-year record look good still. Its low downside risk on account of a widely-diversified portfolio
also helped. That said, unless Ramanathan pulls one out of the hat, time is running out for this once star-performer.
The story is similar for the next scheme in the line, SBI Magnum Global Fund 94 (SMGF). In the past two years, its corpus has risen by Rs
1,282.43 crore, or 304.3 per cent. The steady fresh inflows have resulted in high cash holdings and blunted the edge of this once-aggressive
mid-cap fund. Thankfully, it is alive to the problem and widening the target market cap of companies to invest in.
Meanwhile, Reliance Growth and Birla Midcap funds turned up with yet another round of stellar performances.

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EQUITY-THEMATIC AND SECTOR

Infrastructure was the dominant theme in 2007 as the top five of the 14 thematic funds that made the cut track it. DSP ML Tiger Fund (DMT)
topped on the strength of the highest three-year rolling returns. The schemes focus on capital goods, construction, engineering and banking
worked well. Of these five infrastructure funds, DMT was the least volatile since it has a diversified portfolio. After its fund manager, Soumendra
Nath Lahiri, quit DSP ML, the scheme is being managed by CIO Anup Maheshwari, who has a good long record with the fund house.

Among themes, dividend yield was the worst off. Three of the bottom four schemes in this category invest in dividend stocks.
Elsewhere, in sectoral funds, Reliance Diversified Power Fund was on energy boosters, returning 123.44 per cent in 2007 on the back of the
power and infrastructure fund doing well. The banking funds did well too on the hope of rate cuts. But banking funds had a high scripconcentration risk. Even the CNX Banking Index, the benchmark for the two banking funds that made it to our list, itself has only 12 stocks.
Small wonder then that UTI Thematic Banking Fund was the most volatile of our sectoral funds and Reliance Banking Fund was not far behind.
Funds that track FMCG and pharmaceuticals were sober.

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