Both funds failed to impress

PEER PRESSURE ? Reliance Equity Opportunities & Franklin India Flexi Cap

The names of these funds are pretty misleading when one looks at the investing style of the respective fund managers. One would expect an opportunities fund to aggressively build positions in specific stocks and exit once the price reaches the target level.

Similarly, one would expect a flexi cap fund to constantly change its colours. It would bet on large cap stocks when it sees a rally there and shift to mid and small cap ones when it spots potential here. 

SNAPSHOT
	Franklin India Flexi Cap	Reliance Equity Opportunities
Category	Equity Diversified	Equity Diversified
Type	Open Ended	Open Ended
Benchmark	S&P CNX 500	BSE 100
Launched	Feb-05	Mar-05
Fund Manager	K.N. Siva Subramanian,	Sailesh Raj Bhan
	Sukumar Rajah
Exposure to equity	75-100%	75-100%
Exposure to debt/cash	0-25%	0-25%
Rating	3 star	3 star
Expense Ratio	1.83%	1.86%
AUM (March 2008)	Rs 2540.53 crore	Rs 1839.16 crore

But both these funds do not really cater to such styles. In fact, Reliance Equity Opportunities has displayed a tendency to shift between market caps while Franklin India Flexi Cap showed a bit of aggression in its churning. But only in the initial days.

For some strange reason, Flexi Cap seems to be very cautious in exercising its mandate of moving between various caps. One would have thought that the fund manager would rapidly move in and out of stocks of various market capitalisations since he is not restricted to any single one. But it did not happen.

Franklin India Flexi Cap has been predominantly large-cap oriented and failed to take advantage of the mid-cap rally last year. This could probably explain why its performance was not too impressive in 2007. This reasoning certainly cannot justify the performance of Equity Opportunities.

Equity Opportunities displayed ample flexibility when mid-caps rallied last year by hopping on to that wagon. Ironically, the move did not pay off well for Equity Opportunities. It delivered less than Flexi Cap.

The sharpness of performance depends on a number of factors. The most significant being whether the fund manager is able to derive the maximum advantage from the ongoing rallies "" be in stocks of various market capitalisations or sectors. Which brings us to whether they played the sector card well?

Equity Opportunities remained bold in its technology allocation and took a contrarian stand. By the end of the last calendar year, it had a technology allocation that was higher than Flexi Cap and the category average.

Equity Opportunities maintained a significant allocation to basic/engineering while Flexi Cap betted on financial services. Yet none of them had a significant allocation to energy, metals and realty which ended the year on a good note.

The similarities between these two funds are amazing (see Snapshot). Both have seen their assets dip significantly from February to March. Where performance is concerned, both outperformed the category average in 2006 and failed to do so in 2007.

Concerning the portfolio allocation, both shirked away from debt, maintained high levels of equity and, if the need be, held significant portions in cash. They do not churn their portfolios rapidly and maintain very well diversified offerings.

Though at this point, it may well be mentioned that Flexi Cap does have a more bloated portfolio. Its top five holdings since January 2006 have averaged at almost 27 per cent.

While the same figure stands at 21.78 per cent for Equity Opportunities. And the number of stocks Flexi Cap holds has averaged at 48, while the same stands at 37 for Equity Opportunities.

Equity Opportunities did really well in 2006 and in our earlier analysis we had said that if its performance in the initial years is anything to go by, it would probably emerge as a suitable core holding. But its performance last year was not impressive. The same can be said for Flexi Cap. Even their current performance is nothing to write home about.

A cause for concern, where Equity Opportunities is concerned, is the initial issue expenses. SEBI regulations permitted new fund offerings to charge an amount not exceeding 6 per cent of the initial issue expenses to investors. This amount could be amortised over a period of 10 years.

While Flexi Cap did not avail of this, Equity Opportunities did, putting a further strain on the returns. Investors in these funds must be a disappointed lot since both funds turned out to be average performers. Yet both have huge assets under management.

This is simply because they evoked a huge response at the time of the launch thanks to the pedigree of the fund houses and the timing of launch. By and large, they have failed to exploit opportunity and deliver impressively.

It is probably not fair to make a judgment call on a fund in such a short span of existence. But if you are on the look out for an investment, there are choices within their family. Its very own siblings "" Reliance Vision and Franklin Prima Plus "" make for smarter investments.