Pramerica’s DART to nimbly move between debt and equity—but it may not hit the bull’s eye

he newly-entered fund house Pramerica Mutual Fund’s new fund offer comes with an option of a ‘dynamic plan’ that adjusts the fund’s exposure in tune with market valuation. It is a marketing gimmick—as the examples of three other funds show

Pramerica Mutual Fund, sponsored by the US-based Prudential Financial firm which received the Securities and Exchange Board of India (SEBI) approval to enter the mutual fund business in India last month, has filed a draft offer document to launch the ‘Pramerica Growth Fund’. Pramerica has also filed its draft offer document with the regulator for its ‘Pramerica Liquid Fund’ and Pramerica ‘Ultra Short Term Bond Fund’ on 16 June 2010.

The ‘Pramerica Growth Fund’ scheme comes with two plans. The first one is an equity plan and the second is dynamic. The Equity Plan will invest 35% of its portfolio in debt and 65% in equity. Around 60% of this portfolio will be mainly invested in large-cap companies which comprise the top 75% of the total market capitalisation of the National Stock Exchange (NSE).

Under the dynamic plan, 30% of the portfolio will have exposure to equity and up to 70% in debt. The debt portion of the dynamic plan will be actively managed while the equity portfolio of the plan will closely replicate the equity investments of the ‘Equity Plan’.

The fund house will use Pramerica Dynamic Asset Rebalancing Tool (‘Pramerica DART’ tool) which will determine the allocation between equity and debt. According to the prospectus, Pramerica DART works on the philosophy of mean reversion. The theory of mean revision suggests that prices and returns eventually move back towards the long-term average. Such an average can be the historical average of price or return.

The model factors in three elements like fundamentals, liquidity and volatility. DART assigns a score which indicates whether the stocks are undervalued or over-valued. Based on these scores, the model then calculates the optimum equity-debt mix.

Will DART hit the bull’s eye? Ideas of moving between equity and debt are old and usually add no value to investors. Tata Mutual Fund had launched a similar fund called ‘Tata Equity Management Fund’ in June 2006 which came up with a novel method of pre-deciding the exact quantum of hedging under different market conditions. TEMF, like anybody else, banked on historical data of high and low P/Es to determine degrees of overvaluation. Moneylife had previously reported about the scheme when it was first launched. (Read here: http://www.moneylife.in/article/81/5319.html). This was too simplistic and the scheme has not lived up to its promise. The fund has posted 9.14% return since inception while its benchmark S&P CNX Nifty has posted 18.96% since the fund’s inception.

How have the other funds with similar strategies done? HSBC had launched its ‘HSBC Dynamic Fund’ in August 2007. This fund is benchmarked against the BSE 200. The fund has posted -1.79% returns since inception while its benchmark has yielded 7.53% returns since the fund’s inception.

Similarly, ICICI Prudential launched ‘ICICI Dynamic Fund’ in October 2002. The scheme is benchmarked against the S&P CNX Nifty. The fund has yielded 34.98% since inception while its benchmark has yielded a whopping 58.07% return in the same period.

The ability of fund managers to time the market is a myth, as these three examples show. But fund companies never tire of marketing them, as the Pramerica example shows

Equity funds underperform the rise but buck the fall during the recent round trip of the Sensex

The Sensex rose more than 2,000 points in the Feb-April period and then gave up all the gains thereafter in April-May. How did equity funds do during this period?
The Sensex went up from 15,725 on 5th February this year to its peak of 18,047 on 7th April and quickly fell back to 15,960 on 25th May. The mutual fund sector's performance in this round trip was a study of contrasts. In the rally of 14% in the Feb-April period, only 49 equity diversified growth schemes out of 216 schemes outperformed their respective benchmarks.

This stands in sharp contrast to the performance during the decline of 11% in the April-May period when as many as 174 schemes outperformed their benchmarks. This shows that funds have been conservative with their portfolio construction. By and large they have stayed away from highly volatile stocks that ensured an outperformance during the recent market decline.

The top performer among the 216 schemes during the rally was Canara Robeco Force Fund. Its Net Asset Value (NAV) was up 17% over the period while its benchmark, S&P Nifty was up 14%. Birla Sun Life Long Term Advantage Fund - Series 1 was second with NAV rise of 16%, while BSE500, its benchmark, changed 13%. Templeton India Growth Fund (up 16%), Escorts Growth Plan (up 15%), IDFC Strategic Sector (50-50) Equity Fund-Plan A (up 15%) were among the top five. Out of the 49 schemes, which outperformed their benchmarks, 21 schemes have beaten the Sensex.

Schemes of JM Financial Mutual Fund have been laggards in any market scenario. It repeated this unique distinction during this short rally too. JM Core 11 Fund, JM Emerging Leaders Fund, JM Small & Mid-Cap Fund were among the bottom five. Their NAV yielded a return of 6%, 5% and 3% respectively while their benchmark BSE Sensex, BSE200, CNX Midcap were up between 13-14%. Sahara REAL Fund and SBI Magnum Midcap Fund were the others in the bottom five. Their returns rose 7% and 6% respectively.

Following this rally, the Sensex tumbled 11% between 7th April and 25th May. In this fall, out of the 216 schemes, the NAVs of two schemes actually were up: DSP BlackRock Micro Cap Fund and HSBC Small Cap Fund. The first was up 3% and the second 2% while their benchmark, BSE Small Cap, fell 9%. Others among the top five outperformers were dividend yield plans-Escorts High Yield Equity Plan (1%), Tata Dividend Yield Fund (3%) and ING Dividend Yield Fund (3%) while their benchmark CNX100, Sensex and BSE200 fell 10%, 11% and 10% respectively.

Among the worst performers during this decline were Bharti AXA Equity Fund, Franklin India High Growth Companies Fund, Reliance Natural Resources Fund, Birla Sun Life Special Situations Fund and Religare AGILE Fund. Remember these names. They have stocks that are inherently more volatile.

DSP BlackRock Micro Cap Opens The Door For New Investor......

DSP BlackRock Micro Cap Fund, the only Closed Ended Fund in the Equity basket of DSP BlackRock Mutual Fund, has become an Open Ended Fund from today viz. from 15^th June, 2010. The Fund is now made Open Ended for daily transactions from today onwards.

DSP BlackRock Micro Cap Fund was launched in June, 2007 and the units were offered at Rs. 10/- per unit. The NAV of DSP BlackRock Micro Cap Fund as on 14^th June, 2010 was Rs. 14.765 per unit registering a gain of 14.52% CAGR since inception, one of the best performing Funds in the Equity Fund category in last 3 years.

Background:

As the name of the Fund indicates, DSP BlackRock Micro Cap Fund was launched with an objective to generate long term capital appreciation from a portfolio primarily constituted of Companies not forming part of Top 300 Companies by market capitalization.

The Fund has generated very good returns since its inception (14.52% CAGR) in the respective category mainly because of the better stock selection and active fund management by the experienced fund management team of DSP BlackRock Investment Managers Pvt. Ltd. The following is the return snapshot of the Fund for your information.

Attached herewith please find

(a)   The latest Single Pager of DSP BlackRock Micro Cap Fund.

(b)   The latest Portfolio of DSP BlackRock Micro Cap Fund as of 31^st May, 2010.

(c)   A detailed Presentation on DSP BlackRock Micro Cap Fund explaining its positioning, performance, rationale and opportunities in the Micro Cap segment.

We hope this information will be useful to you to showcase DSP BlackRock Micro Cap Fund to create wealth for your esteemed investors.

We solicit your wholehearted support in the promotion of DSP BlackRock Micro Cap Fund on its re-opening from today for further subscription.

Mutual Funds line up index funds

Fund houses are in a race to launch index funds to shore up their assets under management (AUM). The latest to join is ICICI Prudential Mutual Fund which has floated a new open-ended fund named Nifty Junior Index Fund. The new fund offer (NFO) opened on 10th June 2010 and closes on 21st June 2010. ICICI had launched ICICI Pru Index Fund in February 2002. The scheme is benchmarked against the S&P CNX Nifty.

Over the past decade, there have been only about 20 index funds. But suddenly in the last few months, four new index funds have hit the market. Taurus Mutual Fund launched Taurus Index Fund; IDFC Mutual Fund introduced the passively managed IDFC Nifty Fund in April 2010; and in May 2010, IDBI Asset Management Company (AMC) launched IDBI Nifty Index Fund as its first fund offering.

ICICI Pru's fund will be benchmarked against the CNX Nifty Junior Index and will invest 90% of its corpus in the underlying Nifty Junior Index stocks and 10% in debt and money market instruments.  The CNX Nifty Junior consists of 50 stocks and represents about 12% of the free-float market capitalisation as on 31 December 2009.

The scheme carries a 0.25% exit load if redeemed or switched less than seven days after investing.  Investors can choose growth or dividend option. The Fund bears a maximum annual expense of 1.50%, depending on the corpus of the fund.
Index funds are supposed to exactly replicate their benchmark and outperform most actively managed funds.

Most of the index funds are benchmarked against Nifty or Sensex. The Nifty Junior index is much more volatile than these two main indices. Nifty Junior rises sharply in a bull run and falls as sharply when the market crashes. From the bottom of October 2008 to the peak of April 2004, the Nifty was up 113% whereas the Nifty Junior was up 206%. Earlier, the Nifty Junior had crashed 73% from January 2008 to October 2008 while the Nifty had declined 61% in the same period.   
 
The Fund will compete against the much cheaper 'Junior BeES' launched by Benchmark Mutual Fund, which launched India's first mid-cap index fund in the year 2003.