Business Today

Sultans of swing

twitter-logoManu Kaushik | Print Edition: June 26, 2011

How do you find a good small-cap fund manager? Answer: Find a good largecap fund manager, and wait. The global market meltdown of 2008 had made fund managers the butt of such jokes. The searing market volatility since then coupled with constant changes in the interest rate scenario in response to the liquidity crunch and wobbly commodity prices have tested their acumen. All have struggled but some have delivered superior returns for investors.

Read: India's best fund managers

One such fund manager is Anand Radhakrishnan, winner in the Three-Year Equity (IT) category. He exploited market inefficiencies to earn profits for investors of Franklin Infotech Fund (Growth). During the stock market boom of 2007, the Information Technology, or IT, Index underperformed the broader market.

Ritesh Jain of Canara Robeco
In December 2008, we sold government bonds as we expected the government to borrow more money: Ritesh Jain of Canara Robeco
But following the US sub-prime crisis, the benchmark index, the Sensex, fell to the 8,000-level. "IT stocks performed badly in the subsequent bear market. But we stayed invested in IT stocks. In fact, we migrated from mid-cap IT stocks to large-caps," Radhakrishnan says.

Read: India's best mutual fund houses

Why such obduracy? "Looking at valuations of some big IT stocks - Infosys was trading with a forward price-to-earnings multiple of just 10, and TCS and Wipro at a forward P/E of 9 - we were confident of making solid money once conditions improved." Forward P/E is the ratio of current market price to future earnings. And that is what happened when the markets recovered in 2009: the frontline IT stocks ruled the roost. Franklin Infotech gave returns of 137 per cent in 2009 and 33 per cent in 2010, outperforming the Sensex. Today, Infosys trades at 23.5 times trailing earnings, TCS at 25 times and Wipro at 20.7 times.

Ritesh Jain, Head of Investments at Canara Robeco and winner in the Three- and Five-Year Bond category, spotted the trend in bond markets early in 2008 and changed his strategy, which helped generate aboveaverage returns for Canara Robeco Income Fund (Growth). "In December 2008, we sold government bonds as we expected the government to borrow more money which, in turn, would negatively impact the market," he says. Bond prices fell sharply in January 2009 after the government announced its plan for an additional borrowing of Rs 50,000 crore. Similarly in mid-2010, Jain spotted the threat of inflation early on and hedged the fund's bond position - by buying over-thecounter derivatives - and limited the downside risk to investors. As of March 31, 2011, the three year return of the fund stands at 13.47 per cent.

The Reliance Regular Savings Fund-Balanced Plan (Growth) managed by Omprakash Kuckian and Amit Tripathi, co-winners in the Three-Year Mixed Asset (Aggressive) category, is among a few balanced funds that did well in the three year period. In 2008, during the stock market bust, the duo quickly got out of mid-cap stocks and invested heavily in large-caps. "Money is made in fear and not in consensus. We identified stocks where aberrations were high," Kuckian, who also won in the Five-Year Equity category, points out.

Anand Radhakrishnan of Franklin Templeton
We were confi dent of making money once market conditions improved: Anand Radhakrishnan of Franklin Templeton
The ICICI Prudential Gilt Fund Investment Plan - PF Option, an open-ended fund focused on government securities, or G-secs, has outperformed over the long term by taking timely duration calls. It varied the duration of the fund depending on interest rate move expectations, apart from taking asset allocation calls.

In early 2009, when state governments announced plans to raise Rs 1 trillion (a trillion equals 100,000 crore) from the markets, the yield spread between the G-secs and state development loans, or SDLs, widened to 150 basis points, or bps, on supply concerns. Yield spread is the difference between yields of different debt instruments. "We increased our exposure to SDLs in a big way. We believed this was a short-term trend as supply exceeded demand," says Avnish Jain, Senior Fund Manager, ICICI Prudential AMC and winner in the Three- and Five-Year Government Bond category.

Three months later, when supply turned normal, the yield spread slipped to 80 bps. "In this way, we were able to generate additional annualised returns," he says. Today, Jain is sitting on a portfolio that includes 30 per cent investments in G-secs and the rest in cash and cash equivalents. "We expect further rate hikes. Inflation is still a big concern. But gilt fund returns are expected to beat a majority of debt instruments in the long-run," he says.

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