Most wanted stocks

We revisit India's most wanted stocks and find out which are the favourite stocks of fund managers and the hottest sectors they are investing your money in.

Narayan Krishnamurthy and Devangshu Datta         Print Edition: December 27, 2007

It’s a question that perplexes even the most astute investor: how does one pick a good stock?

We all know that investing in equities is the best way to create wealth. But picking the right stock is fraught with difficulties. You need to be able to separate genuinely solid companies from those that just make a lot of noise, time the market, and do this before everyone realises that the stock is a winner.

Or take the easy way out. Look at what the experts are buying, mimic their portfolios, and chances are you’ll make a neat packet.

FAVOURITES, OLD AND NEW
Rank in 2007Rank in 2006CompanyFund holding* (Rs cr)Fund count**
12Reliance Industries8,930.10227
215Larsen & Toubro5,424.24179
323ICICI Bank5,052.89177
48Bharti Airtel4,495.55189
510Reliance Communications4,471.96185
64State Bank of India4,422.14186
76Bhel4,300.23174
89ONGC3,093.25129
93Grasim Industries3,059.19148
1011Siemens2,816.68110
* Value of equity held by mutual funds; ** Number of funds holding the stock

That’s why we decided to make the MONEY TODAY-Value Research ranking of India’s Most Wanted Stocks an annual event. From a universe of over 6,000 stocks, we culled out 45 that are favourites of fund managers.

These rankings can be useful to mutual fund investors as well as direct investors in equity. The former can rest assured that fund managers are doing their best to generate healthy returns. And active equity investors can take a leaf out of the fund managers’ book and create similar portfolios.

We take you through the hottest sectors, as well as the most popular large-, mid- and smallcap stocks. And finally, a word of caution: the most wanted stocks are not always the most rewarding, so don’t rush in with your eyes shut. Remember that it is, after all, your money and your investment.

LARGE CAPS

Movers get shaken

When you look at fund managers' choices to improve your investment returns, you are actually using fund picks as a filter to decide which stocks to examine in detail. After all, you cannot invest in all the stocks a fund puts its money in. The large cap component of mutual fund portfolios is often the least revealing. It changes the least over time and most stocks are common to diversified equity fund portfolios.

CLICK HERE TO VIEW THE TOP 25 LARGE CAP STOCKS

But over the past year, there have been some major changes and this year’s rankings threw up a number of surprises. For one, 10 out of the top 25 stocks are new entrants. And then there’s the huge churn in rankings, where we find that no stock has retained its previous ranking. Not even the top five. Reliance Industries (RIL), last year’s second, takes top spot this year. Infosys, last year’s topper, has slipped to 12th place. And last year’s laggard, ICICI Bank, has zoomed to the third place.

Yes, this says a lot about the state of the markets and the economy as a whole, but it has truly farreaching implications for you, the investor. It says very clearly that if you want a piece of the most wanted companies, you cannot afford to follow a buy-and-hold strategy. You will have to be an active investor.

NEW BEAUTY CONTEST
STOCKFIRST HOLDINGSECOND HOLDINGTHIRD HOLDING
Reliance Ind921718
Larsen & Toubro162319
ICICI Bank132011
Bharti Airtel5417
Reliance Comm61517
Figures are number of funds having these stocks as their first, second or third highest holdings

Most fund managers invest the bulk of the fund corpus in large caps belonging to the benchmark indices, because they can neither wait years for the stock to begin performing, nor can they take undue risks. This is a safety-first strategy in two ways. The portfolios resemble the indices. So, performance will be reasonably similar to the benchmark.

Even if the portfolio doesn't do well, the manager has little to explain. After all, he has bought large companies that are household names. It’s no wonder, then, that 90% of any diversified equity fund holdings is in large-cap stocks.

Yet, like our last year’s ranking of most wanted stocks, this year’s list too has several lessons for stock and mutual fund investors. For instance, the quality of fund management — or a stock pick — depends not just on the quality of holding but also on the timing of acquring that holding. Two mutual funds that hold exactly the same portfolios can yield different returns. It depends on when the fund managers bought each stock and at what price.

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