In top gear: Is Maruti IPO's resounding success an indicator of appier times for stockmarkets?

Zoom back to April 25, 2003: the BSE Sensex fell to a near six-month low of 2,924. And then? Cut to June 25, 2003: the Sensex vaults to 3,520, a 15-month high. What happened?

In brief, many of the stockmarkets' worst problems resolved themselves. The Iraq war was over much sooner than anybody could have guessed, and decisively in favour of the US. After that the war concluded, a market rebound was seen as just a matter of time. Further, signals from the US economy indicated that the worst was over.

And then came the big boost: the Maruti initial public offer (IPO). It sent stocks of public sector enterprises roaring to the top, stirring enough excitement to turn the market bullish.

Maruti Drive

The BSE PSU index has outperformed every major index on the globe. It delivered a return of 45.6 per cent over the quarter ended June 30, 2003. Mid-cap stocks had a similar story. The CNX mid-cap index jumped almost 46 per cent. The market on the whole was buoyant. The Sensex managed to yield an impressive return of 18.3 per cent.

But the major disappointments were the BSE it and the BSE Teck indices, which gave negative returns of 13 and 3 per cent, respectively. This time the NASDAQ had nothing to do with it (the NASDAQ composite was up 21 per cent). What hurt the tech sector, apart from N.R. Narayana Murthy's famous profit warning, was the appreciating rupee coupled with the hardening of us opinion in policy circles on the BPO issue.

Mid-Cap Might

The mid-cap equity funds were the flavour of the current financial year's first quarter as they raked in the most impressive returns. The mid-cap funds were fuelled by positive news on the macro-economic front. In fact, 'fabulous' would be an understatement for their returns this quarter.

The Franklin Prima Fund, a mid-cap fund, gave the best returns of 47.9 per cent. The fund has always been a decent performer and has a very well diversified portfolio that is spread across various sectors with highest exposure being in automotive sector stocks (infotech stocks constitute a miniscule 0.8 per cent of the funds portfolio).

All the top equity fund performers had a high concentration of mid-cap stocks. Birla Equity Fund, second on the honours list, had an allocation ranging between 35 per cent and 50 per cent in mid-cap stocks during the quarter. Prudential ICICI Taxplan, again, was very high on mid-cap stocks-with an allocation of 53 per cent in May, nearly 9 per cent more than it was in April. But in June, its mid-cap holding stands pared to 47 per cent. Junior BeES, another fund that figures in the top five performers, has nothing but mid-cap stocks.

Out of the 144 equity-based schemes, just five schemes gave a negative return-and all of these were it funds. The average return, though, was an impressive 22.5 per cent, which is much better than the Sensex return (68 schemes outperformed this average). This was a complete reversal from the previous quarter, where just two schemes delivered positive returns.

As opposed to the equity market, the debt market was in a bit of a muddle, owing largely to the uncertainly regarding the way interest rates would move. While Europe and us saw their benchmark rates pared late in June, domestic rates do not look like they would go down any further.

This means that income funds won't behave like waves in the ocean on a high-tide day. Unlike the previous quarter, when income funds failed to deliver due to upward pressure on interest rates, they posted an average return of 2.8 per cent this quarter.

Among income funds, schemes with greater exposure to gilts outperformed others. The top performer, Deutsche Premier Bond Fund-Regular Plan-Growth, a new entrant in the Indian mutual fund market, had a fairly balanced portfolio with a 54 per cent allocation in gilt securities, when compared to others. Prudential ICICI Flexible Income Plan and Sundaram Select Debt-dap-Growth, both had the heaviest allocation of close to 83 per cent in government securities. HSBC Institutional Income Fund-Investment Plan- Growth, again has a well-diversified portfolio stacked with high-quality debt. The fund has marginally increased its average maturity from 6.5 to 7.1 years in the last quarter.

There seemed to be a mixed trend as far as maturity profile of the portfolios are concerned. Between May and June, of the 79 schemes for which data was available, 43 had a shift towards a lower maturity portfolio, while 32 increased their maturity profile.

Of the 38 schemes in the balanced funds category, the average return was 15.6 per cent. HDFC Prudence Fund, which belonged to the erstwhile Zurich stable prior to being acquired by HDFC Mutual Fund, delivered the most impressive returns.

The portfolio of this top performer is modestly diversified with 62 per cent exposure in equities. It carries 17 stocks (as of June 30, 2003) and close to 25 per cent of its corpus is in mid-cap stocks. Birla Balanced has a little higher exposure in equities at 68 per cent.

Liquid funds have seen the 'institutional plan' war hotting up, as more and more fund houses are wooing investors with lower expense ratios. Investors are pleased- at the cost of distributors, whose brokerages have been pared. The industry has seen huge mobilisations in these plans in the last quarter. The average return delivered by liquid funds was 1.3 per cent, which is as expected.

Gilt funds have continued to be attractive in spite of there being no rate cuts in the quarter. Perhaps the high volatility in the gilt markets, propelled by intermittent period of high and low liquidity, gave a lot of opportunity to fund managers to churn their gilt portfolios, much to the advantage of investors.

This gilt story was also responsible for the movement of even debt portfolios towards a gilt-heavy allocation. The 48 schemes delivered an average return was 3.7 per cent.

Risk-Adjusted Rankings

Among equity funds, the top performer was Franklin India Prima Fund-Growth. This is followed by SBI Magnum Sector Umbrella, a well-diversified portfolio that follows a value investing style. That is, it picks up stocks that might be languishing at the bottom, but with good growth potential. Reliance Growth, which has the objective of providing long-term capital appreciation, is ranked 11th in terms of absolute returns, but with low volatility, ranks third.

The balanced funds rankings remain almost unchanged since last quarter, with the exception of ft India Balanced, which replaces UTI's us-95 from the fifth position.

Escorts Income Plan continues with its top position in the risk-adjusted category. But there is more to it than meets the eye.

The portfolio is loaded with state government securities, most of which are thinly traded, due to which the valuation does not reflect the volatility due to interest rate movements. This leads to its very low standard deviation, which props it up to the topmost rank on a risk-adjusted basis. PNB Debt Fund rated as an 'AAA' high safety mutual fund by ICRA is close behind at number two.

KM K Gilt 98-Investment Plan-Growth was the only portfolio in the top five gilt funds with just a 57 per cent allocation in gilts when the norm amongst others was 75-96 per cent. It also reduced its average maturity drastically from 14.7 years to 6.9 years. On the other hand, other funds in the category generally have a higher maturity profile.

The Road Ahead

Good times are here, and could possibly become even better if the Indian economy moves strongly on the modest graph towards recovery that it seems to be charting. The recent bull run has seen the return of foreign institutional investors (FIIs), investing in a big way in the stock markets after quite some time.

Whether the bull run on the stockmarkets stays or fizzles out would be decided, among other things, largely by the intensity with which these foreign institutional investors continue romancing the stockmarkets. And while the jury is still out on what would be the best bets, one could say with eyes closed that the mid-cap party would continue into the wee hours.