WITHIN THE GIVEN PATH.
FUND managers are mutual fund industry's most celebrated figures. However, they work within the rules and processes laid down by the fund house and the mandate of schemes they manage.
These have a much larger bearing on returns than we realise.
The processes and rules relate to stockpicking, sectoral exposure, booking of profit/ loss and churning and cash holding.
Some investment curbs are regulatory.
Then there is the scheme's mandate. For instance, the mandate it says will invest in large- cap stocks, the fund manager cannot deviate from this and buy mid- cap stocks. They of course have flexibility to buy or sell securities within these limits.
STOCK- PICKING STRATEGIES
The two stock- picking strategies adopted by fund houses are top- down and bottomup approach. Some fund houses use both.
In the former, the fund manager looks at the overall economy and zeroes in on sectors and stocks that can benefit from the prevailing scenario. In bottom- up approach, the fund manager usually focusses on fundamentals of firms irrespective of the overall economic situation.
" We follow a bottom- up approach to select stocks based on fundamental research with a medium- to long- term perspective and ignore momentum stocks," says Anand Radhakrishnan, senior vice- president and portfolio manager, equity, Franklin Templeton Investments.
Depending on the scheme's mandate and the fund house's strategy, a fund manager can either pick growth stocks ( with good growth potential but high valuations) or value stocks ( cheap with good growth potential) or both.
For example, Religare Tax Plan, a four- star tax- saving scheme, focusses more on growth- oriented firms. " We back growthoriented businesses, particularly in the mid- cap space," says Vetri Subramaniam, chief investment officer, Religare Mutual Fund.
A team of researchers and analysts helps the fund manager prepare a list of securities that meet the criteria of the fund house and the objective of the scheme. The team also mines for stocks which can be a good investment and tracks firms in which the fund has already invested.
Each fund house has an investment panel that includes the chief investment officer, fund managers and research analysts.
It reviews performance of plans and market outlook as well as prepares the investment strategy.
This panel vets all investment proposals, which mention the background of the management, business outlook, financial analysis/ valuation and reasons for the recommendation.
Neelesh Surana, head, equity, Mirae Asset Global Investments, who manages Mirae Assets India Opportunities Fund, says the research team contributes both in generating ideas and coverage of investee firms.
Apoorva Shah, executive vicepresident and fund manager, DSP BlackRock Mutual Fund, says, " We believe that consistent application of our research and process will produce superior long- term performance with below- market volatility."
Some fund houses adopt a sector- agnostic approach in which they use bottom- up stock- picking and do not take sector calls.
" Our focus is on quality through bottom- up approach rather than taking top- down sectoral calls and in that sense our sectoral exposures are a derivative of individual stock exposures," says Anand Radhakrishnan of Franklin Templeton. Fund houses such as these may have a view on a large theme like domestic demand- driven businesses rather than a sector.
But there are schemes which, depending on their goal and nature, can take sound sector calls.
For example, UTI Opportunities Fund takes concentrated bets on four- five sectors.
" Though there was a fund manager change in 2011, the fund's investment style and portfolio characteristics have remained the same-- large- cap bias, 35- 37 stocks portfolio and focus on four- five sectors," says Anoop Bhaskar, head of equity, UTI Mutual Fund.
ON TIGHT LEASH
Cash holding and portfolio turnover are two areas where mutual fund firms give norms to fund managers.
A fund's nature and objective also have a significant bearing on the fund manager's cash strategy.
For instance, ICICI Prudential Dynamic Fund, a large- and midcap asset allocation fund, has a mandate for large cash holdings when equity markets are at a high. At the end of December 2010, its 20 per cent portfolio was cash. But for most equity funds, the cash limit is 10 per cent.
Chintan Haria, senior fund manager, ICICI Prudential AMC, says, " We do not believe in taking cash calls. Our cash holding is limited about 10 per cent, except in funds that have a mandate to do so.
" Cash to us is a residual strategy.
When we do not have a good stock to buy, we hold cash and wait for an opportunity to deploy it," says Huzaifa Husain, head, equities, AIG Investments, India.
Another strategy fund managers adopt to generate high returns is frequent churning, but not all fund houses give fund managers a free hand in this regard. A low portfolio turnover ratio means the fund manager is holding stocks for longer periods.
HDFC Mutual Fund plans such as HDFC Top 200 and HDFC Equity have the lowest portfolio turnover ratios. The average portfolio turnover ratio of HDFC Top 200 in 2011- 12 was 19.7 per cent and that of HDFC Equity was 33 per cent. Compare this to DSPBR Top 100 Equity's average portfolio turnover ratio of 251 per cent, DSPBR Equity's 185 per cent and Franklin India Bluechip's 65 per cent.
Leaving everything to the fund manager's strategy may spell trouble for the scheme if its fund manager moves on.
Having a basic fund management framework at place ensures a plan does not end on such exits.
is portfolio turnover ratio of HDFC Top 200, lowest in large- and mid- cap equity category
CHECKS AND BALANCES
Each investment proposal is reviewed by the investment panel comprising managing director, chief investment officer and fund managers Details such as company background, business outlook, valuations and reasons for recommendation are taken into account before investing The final investment proposals have details such as net assets of the scheme and extent of exposure to the company The investment panel periodically updates the board of directors of the fund house and the trustee company to review the scheme's performance The investment committee ensures that the fund manager invests the funds of the scheme in line with its objective and investors' interest
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