Finding value in emerging themes

Reliance Equity Opportunities Fund was launched in March 2005 and has been consistently ranked Crisil Mutual Fund Rank 1 in the diversified equity category for the past four quarters (December 2009-September 2010). The assets under management of the fund as on September 2010, stood at Rs 2,792 crore. The fund is jointly managed by Sailesh Raj Bhan (since March 2005) and Viral Berawala (since September 2010).

Performance

The compounded annualised growth rate (CAGR) of the fund has been consistently higher than the benchmark (BSE 100) and peer group over the last 1, 2, 3 and 5-year time frame. Over a two-year period, the fund’s CAGR was a healthy 65 per cent as against the benchmark’s 46 per cent and peer group’s 49 per cent. Over a one-year time frame, the fund gave 30 per cent returns as against 16 per cent by the benchmark and 19 per cent by the peer group.

Further, Rs 1,000 invested in the fund at inception would have grown to Rs 3,840 as on December 31, 2010, while the same sum invested in the benchmark index and peer group would have grown to Rs 3,130 and Rs 3,194, respectively.

Investment philosophy
Reliance Equity Opportunities Fund has the flexibility to be overweight on a particular sector or market capitalisation depending on the potential and opportunities that arise. Thus, the fund seeks to capture a particular market trend.

An analysis of the top five sector exposures of the fund over the last three years reveals that pharmaceuticals, software, banks, retailing and power transmission have been the most favoured sectors. This is in line with the investment philosophy of the fund which tries to capture emerging themes and opportunities, which may not have been spotted by a majority of its peers.

Accordingly, the average exposure to the pharmaceuticals sector stood close to 15 per cent over the past three years as compared to 6 per cent exposure by its peers and only 3 per cent exposure of the benchmark index. The CNX Pharma Index has given a return of 17 per cent over the last three years as compared to a negative return of 1.45 per cent by the BSE 100 during the same period. In fact, the CNX Pharma Index has given more than twice the return (35 per cent) as compared to the BSE 100 index (16 per cent) over the past one year. Thus a relatively higher exposure to the pharmaceutical sector has helped the fund generate superior returns as compared to its peers.

The fund also seeks to diversify its portfolio across market caps. Over the last three years, the fund has shown a tilt towards mid-cap stocks. During this period, the average exposure to Crisil-defined large cap stocks was less than 40 per cent.

Active cash calls
The average equity investment over the last three-year period has been 92 per cent. The fund manager took active cash calls during the recent bear run. During the period starting May 2008 till May 2009, the average portfolio exposure to cash and cash equivalents stood at 13 per cent. This helped the fund to cut its losses during this phase. While both the benchmark and peers fell by 12 per cent during this period, the fund had a comparatively lesser fall of 10 per cent.

Post May 2009, the fund drastically reduced its cash and cash equivalent exposures to an average of 5 per cent till November 2010. Thus when the markets rebounded, this strategy helped the fund recover faster than the peer group. The fund has gained almost 50 per cent since May 2009, as compared to gains of 22 per cent and 30 per cent by BSE 100 and peers, respectively.

Portfolio diversification
The fund has held an average of 33 stocks in its portfolio over the past three years and is moderately diversified at the stock level. On an average, the top 10 holdings constitute 41 per cent of the portfolio. The fund is reasonably diversified in terms of the sectors.

—Crisil Fund Services