Large-cap funds ideal for protective investors

Since the March lows, the Indian market has been in a sweet spot due to a combination of ample global liquidity and an ongoing recovery in the economy. 

Foreign institutional investors have made purchases to the extent of Rs 85,977 crore in Indian equities since March. The markets showed extraordinary resilience even in the face of global pressure points, such as the Dubai debt debacle.

Economic news was very strong with second quarter GDP for financial year 2009-10 clocking a 7.9% growth compared with 7.1% clocked during the same period of the previous year.

Large-cap stocks are the first ones to benefit in a recovering market with mid- and small-cap stocks usually enjoying the fruits of the rally in the latter phase.   We evaluate the performance of the top large-cap oriented mutual funds.

Principal Large Cap Fund - Growth:  It is predominantly a blue-chip fund and defines large-cap companies as those that have a market capitalisation greater than Rs 750 crore.

This scheme has delivered better returns than its benchmark (BSE 100) over the past six months and one year. However, during 2008, which was mainly a bear phase, the scheme lost 58.83%, more than its benchmark and peers. While over a three-year period, the risk-adjusted returns of the scheme are high, there have been periods of underperformance, especially in the downturn.

If we consider the top 100 stocks by market cap of the BSE 500 index as large cap and then compare the market capitalisation of the Principal Large-Cap portfolio, we find that the scheme has maintained a considerable portion of its assets in mid-cap stocks. This could have been a probable reason for the higher-than-average risk of the scheme. The scheme has been a following a large-cap blend (mix of growth and value stock) style of investment since June 2008.

The fund has outperformed its benchmark over the three-year period, mainly due to the increased allocation to automobile and banking sectors, which make up approximately 23% of the portfolio. These sectors during this phase have substantially outperformed the BSE Sensex.

During the last one year, the fund manager has increased its exposure to public sector banks — State Bank of India and Allahabad Bank — and decreased exposure to ICICI Bank. ICICI Bank has posted 147% absolute returns against SBI’s absolute returns of 106% for the last one year.

Oil and gas sector, which has the highest allocation in the portfolio at 20.4% currently, has witnessed an increase in exposure in the last two years and has underperformed compared with the overall market. In April 2009, the scheme made a new entry by buying IndianOil Corp, which has underperformed the BSE oil & gas index significantly till date.

At the same time, the fund manager has timed his moves appropriately in the IT sector
over the past year as the sector began picking up pace. Though the allocation to the metal sector is 5% of the total portfolio, the sector has outperformed its peers and Sensex by a wide margin over the last three years.

DSP BlackRock Top 100 Equity     Fund - Growth:   The scheme is benchmarked against the BSE 100 index. The fund has an excellent long-term track record. During 2008, the absolute returns of scheme had dropped to 45.54%, lesser than the benchmark and the peer group. The increased allocation to the pharma and FMCG sectors during the past three years has helped the scheme outperform its benchmark.

The scheme has been growth oriented during the bear phase, but has recently converted itself into a blend-styled scheme, which indicates the fund is picking more defensive stocks, whose presence ensures lower volatility.

The average exposure in the IT sector has increased over the last one year with accumulation of TCS stock. The fund manager has shown high confidence in the banking and oil & gas sectors, which together constitute approximately 30% of the scheme’s portfolio for the past one year. During the one-year period, the scheme has increased its exposure to oil & gas sector, which could be a probable reason for the underperformance of the scheme compared with its benchmark.

HDFC Top 200 - Growth: Adhering to its investment mandate, the fund forms its portfolio primarily from the companies in the BSE 200 index. It has delivered excellent performance in the long term. Even during the span of two years when most of the schemes dipped, HDFC Top 200 delivered positive compounded annualised returns of 4.61%.

Fund manager Prashant Jain has maintained a well-diversified portfolio for the past three years of around 50-70 stocks with 17-23 sectors, which helps reduce unsystematic risk.

The scheme has maintained a high allocation to the banking sector and a low exposure to the oil & gas sector as compared with its peers.  This has helped it rake in high returns as the former sector has shown a commendable performance while the latter has underperformed the Sensex.

In the last one year, the fund has made a fresh entry into LIC Housing Finance (2.9% of the scheme’s November portfolio), which has given a return of 425% in the last one year.

The fund manager has accumulated State Bank of India and ICICI Bank in last one year
and both have outperformed the BSE 200 index. He also reduced exposure in Reliance Industries , which has underperformed the benchmark. The scheme adheres to a strict buy and hold philosophy with little churn in holdings and sector bets.

Franklin India Bluechip: It has been among the more stable schemes, delivering above-average returns consistently.  The steady performance of the scheme, along with a corpus of above Rs 2,700 crore, has helped it maintain investor confidence. The scheme focuses on well-established, large size companies.

The highest allocation has been towards the banking sector, followed by the oil & gas sector. Though the exposure to the telecom sector has reduced from 9% to approximately 5% in the past six months, the overall exposure in this segment has remained substantially
high.

This has contributed to lower returns as the sector has remained an underperformer. The exposure to the FMCG sector has also reduced over the last six months.

Tata Pure Equity Fund: The scheme focuses on undervalued large-cap companies. It has delivered above-average returns over various time frames. The scheme is diversified across 30 to 50 stocks and across 17 to 28 sectors, mostly in the past three years. This provides the scheme with a lower volatility.

The scheme has, however, maintained a very low exposure to the banking sector and the exposure to oil & gas sector has also been reducing consistently. A sudden hike has been seen in the IT and automobile sectors over the past six months. The scheme has reduced its exposure in the capital goods sector, which has been an outperformer in the past three years, while it has increased exposure in the underperforming FMCG sector over the past two years.

In a nutshell
The large-cap category in the previous bull phase delivered average annualised returns of 44.26%, beating the market barometer — BSE Sensex — which returned 35.59% annualised returns over the period of six years (CY 2002-2007).

Hence, the current recovery phase could hold similar investment opportunities for investors, particularly the ones who are nervy and shun excessive volatility in returns.
Though the large-cap category is known to offer better protection to investors in the downturn, there are exceptions to this rule.

More aggressive, racy investors might find themselves dissatisfied with the returns delivered by these funds as these schemes may not appear in the top slot of the diversified equity category further into the recovery.