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Citrus Analysis: Mirae Asset India Opportunities Fund: A smooth ride
Mon, Oct 29, 2012
Source : Prashansa Karnani, Citrus Interactive

Mirae Asset India Opportunities is a large-cap growth fund that was launched in March 2008. At present, the fund has Rs 257.43 crore under management (as on September 30, 2012). It is benchmarked against the BSE 200 Index.

Fund performance

Scheme name

YTD

1-Yr

3-Yr

5-Yr

SINCE INCEPTION

Mirae Asset India Opportunities Fund-Reg(G)

26.45

17.96

37.81

-

13.54

BSE-200

24.67

13.77

10.15

8.91

-

All figures in %; as on Sept 30, 2012

Year-to-date (Sept 30, 2012) the fund has given a return of 26.45 per cent. It currently leads its benchmark by a narrow margin of 1.78 percentage points. The fund has also beaten its benchmark over the one- and three-year horizons by wide margins (4.19 and 27.66 percentage points respectively). Since inception (March 2008) the fund has given reasonable returns of 13.54 per cent compounded annually. According to Neelesh Surana, head of equities and the co-fund manager in charge of this fund, “The previous 4.5 years (since the fund was launched) have been quite challenging for the fund, with two large down cycles in late 2008 and 2011. However, on an absolute basis its performance has been remarkably satisfactory, with its NAV appreciating nearly 80 per cent over this period.”

Scheme Name

2011

2010

2009

Mirae Asset India Opportunities Fund-Reg(G)

-19.7

23.12

104.48

BSE-200

-27.03

16.22

83.88

Out/under performance

7.33

6.9

20.6

All figures in %; as on Sept 30, 2012

Next, let us look at the fund’s calendar year wise performance to see if it has been consistent. Remarkably, the fund has beaten its benchmark in all the three calendar years for which it has existed. It has provided sound protection to its investors in declining markets too. In 2011, when the markets were falling, the fund managed to decline less than its benchmark by a broad margin of 7.33 percentage points. The co-fund manager also mentions “the dividend plan of our fund has a strong track record of dividend payment, and has paid dividend in three out of the last four years. The investors would have altogether accumulated 39 per cent over this period.”

Investment strategy and philosophy

According to Neelesh Surana: “As this is a diversified fund, the overall strategy is to participate in businesses that can deliver superior returns within their respective sectors. The fund’s portfolio is comprised of companies with a high return on investment (ROI), strong corporate governance, and valuation with an upside potential. This is our flagship scheme and we take many risk-control measures.” As part of their investment strategy the fund fact sheet (dated September 30, 2012) mentions, “We are avoiding two pockets in the market, investing in companies with rich valuation as the margin of safety is low and companies which are available at cheap valuations but with weak businesses models as we feel there are enough opportunities available outside these two pockets in the market.”

The co-fund manager further adds: “We don’t shy away from taking contrarian opportunities and participating in businesses whose long-term prospects will stay intact, even though they may be momentarily passing through a tough time.”

On the composition of the fund, he says: “The market bias in this fund is similar to that of the underlying benchmark, BSE 200. Around 70 per cent of the portfolio is focused on large-cap stocks. This is because in a challenging environment large-cap stocks are in a better position to perform. However, the fund is quite nimble footed and has the flexibility to have a 10-30 per cent exposure to mid-caps. Within mid-cap stocks, we prefer companies with minimum cash flow generation of Rs 100-200 crore. Very small companies form hardly 2-3 per cent of the portfolio.”

According to Surana, “Unless the circumstances are compulsive, there will not be much deviation in the sectoral allocation of the fund vis-à-vis the benchmark. A more bottom-up approach is adopted to participate in quality names. There is strong emphasis on research to identify those companies that can do better than the overall sector.  Also, our global risk policy does not permit us to invest in futures and options.”
 
Portfolio characteristics

Number of equity holdings. The fund currently holds 56 stocks in its portfolio. This is much higher than the median number of stocks in the portfolios of all diversified-equity funds, which currently stands at 41. Average equity count since inception (March 2008) is 47.51.

Sector concentration


Top 3

Top 5

Top 10

Mirae Asset India Opportunities
Fund-Reg(G)

45.34

64.68

85.64

Median-diversified equity category

49.01

66.86

88.37

All figures in %

The fund’s concentration in the top three, five and 10 sectors in its portfolio is lower than the median for the diversified-equity category.

Company concentration


Top 3

Top 5

Top 10

Mirae Asset India Opportunities Fund-Reg(G)

13.64

22.09

38.94

Median-diversified equity category

19.51

29.12

48.01

All figures in %

The fund’s concentration in the top three, five and 10 stocks is also considerably lower than the median for the diversified-equity category.

Based on an examination of the number of equity holdings in its portfolio, sector concentration and company concentration, one can conclude that this is a relatively more diversified fund. According to the fund manager, “Barring one or two sectors the fund has representation across almost all sectors, with 45-50 companies in its portfolio. This is mainly for risk mitigation.”

Turnover ratio. According to the fund’s latest portfolio disclosure, it had a turnover of 61 per cent. This is lower than the median of 75 per cent for the diversified-equity category.

Historically the fund has had a slightly higher turnover ratio: its average since inception has been 94.6 per cent. However, the high turnover is justifiable, as the fund has given consistently high returns.

Expense ratio. The fund currently has an expense ratio of 2.37 per cent, which is slightly higher than the median of 2.34 per cent for the diversified-equity category.

Cash calls. Since 2008 (inception), the fund’s average allocation to cash has been 4.7 per cent. The fund had a high cash allocation of 19.94 per cent in April 2008 (around the time it was launched). Apart from this, the fund has never had a double-digit allocation to cash in its life span of 4.5 years.

Says the co-fund manager: “Our philosophy is not to take cash calls.” A low cash allocation is a positive when markets are rallying. However, it can also lead to larger risks and losses in a declining market.

Risk measures
 

Beta

Standard Deviation

Mirae Asset India Opportunities Fund-Reg(G)

0.8561

1.0241

Median-diversified equity category

0.8048

1.0039


An examination of risk measures such as standard deviation and beta shows that the fund has a higher level of volatility than the median for the diversified-equity category.

Risk-adjusted returns


Treynor

Sharpe

Mirae Asset India Opportunities Fund-Reg(G)

0.0439

0.0401

Median-diversified equity category

0.0248

0.0232


Based on measures such as Treynor ratio and Sharpe ratio, one can say that the fund’s level of risk-adjusted return is higher than the median for the diversified-equity category.

Portfolio strategy

2011. In calendar year 2011 the markets declined: the Sensex fell -24.64 per cent, the BSE Mid-cap Index fell -34.19 per cent, and the BSE Small-cap Index fell -42.61 per cent. That year the BSE-200 Index fell -26.95 per cent. However, the fund managed to restrict its decline to -19.64 per cent.

The fund started the year with an 84.70 per cent allocation to large-cap stocks. This was maintained at 84.59 per cent by the end of the year. The fund’s average allocation to large-cap stocks stood at 80.64 per cent during the year.

The fund started the year with 13.19 per cent allocation to mid-cap stocks. This was reduced to 10.08 per cent by the end of the year. Average exposure to mid-cap stocks stood at 13.14 per cent during the year.

Exposure to small-cap stocks was minimal. It was 1.02 per cent at the start of the year and increased to only 1.4 per cent by the end of the year. Average allocation to small-cap stocks stood at 1.07 per cent during the year.

The fund began the year with 1.09 per cent exposure to cash and cash equivalents. This had increased to 8.47 per cent in June. However, it again declined to 3.87 per cent in December. Exposure to cash and cash equivalents averaged 5.11 per cent during 2011. Thus, the fund by and large chose to remain invested in the markets rather than shift into cash in a big way in a declining market.

In 2011 only the BSE FMCG (9.53 per cent) turned in a positive performance. All the other sector indexes gave negative returns: BSE Healthcare (-12.83 per cent), BSE IT (-15.72 per cent), BSE Teck (-16.47 per cent), BSE Consumer Durables (-16.87 per cent) and BSE Auto (-20.44 per cent).

Sector allocation- 2011
 

Sector

Jan-11 (%)

Dec-11 (%)

Raised/lowered allocation (%age points)

Consumer Non Durables

6.20

12.29

6.09

Petroleum Products

5.47

7.17

1.70

Software

10.46

11.85

1.39

Finance

3.50

4.62

1.12

Media & Entertainment

2.49

3.45

0.96

Oil

3.18

3.92

0.74

Pharmaceuticals

9.21

7.90

-1.31

Auto Ancillaries

5.45

3.64

-1.81

Auto

7.02

4.27

-2.75

Banks

18.47

14.77

-3.70

All figures in %

During the year the fund raised its allocation to consumer non-durables by 6.09 percentage points. The fund also raised its allocation decisively to petroleum products, software, and finance and marginally to media and entertainment and oil.

Among its top 10 holdings, the sector to which it lowered its exposure the most was banks. The fund also lowered its exposure to auto, auto ancillaries, and pharmaceuticals. Says Neelesh Surana, the co-fund manager: “In 2011 we participated in very high-quality franchises, which include core companies in pharmaceuticals, FMCG, and IT sectors. At the same time we were underweight in weaker or stable businesses in infrastructure, construction, and real estate. These were some of the calls that worked for us in 2011.”

Fund versus index-December 2011

Sector Name

Fund Holding (%)

BSE200  (%)

Over/under weight vis-a-vis index
(%age pts.)

Media & Entertainment

3.45

0.68

2.77

Auto Ancillaries

3.64

0.94

2.7

Pharmaceuticals

7.9

5.44

2.46

Software

11.85

9.92

1.93

Oil

3.92

3.17

0.75

Petroleum Products

7.17

6.99

0.18

Consumer Non Durables

12.29

13.21

-0.92

Auto

4.27

6.26

-1.99

Finance

4.62

7.86

-3.24

Banks

14.77

18.3

-3.53


All figures in %; as on Sept 30, 2012

By December 2011 the fund was overweight compared to its index on media & entertainment, auto ancillaries, pharmaceuticals, software, oil, and petroleum products.

Among its large holdings, it was underweight compared to its index on banks, finance, auto and consumer non-durables.

2012. Year-to-date (Sept 30, 2012) the BSE Sensex is up 21.40 per cent, the BSE Mid-cap Index is up 28.67 per cent, and the BSE Small-cap Index is up 26.45 per cent.

Year-to-date (Sept 30) the fund is up 26.45 per cent, slightly ahead of its benchmark, which is up by 24.67 per cent.

The fund began the year with 83.95 per cent allocation to large-cap stocks. This had been reduced to 79.43 per cent by September. So far this year the fund’s allocation to large-cap stocks has averaged 82.72 per cent (approximately 2.08 percentage points higher than in the previous year).

In case of mid-cap stocks, the allocation has risen from 9.44 per cent in January to 12.68 per cent in September, averaging 11 per cent so far (approximately 2.14 percentage points lower than last year).

Exposure to small caps has been minuscule so far, averaging 0.92 per cent. Similarly exposure to cash and cash equivalent has also been lowered from 5.79 per cent (at the start of the year) to 2.35 per cent in August 2012. So far this year its average has been 3.95 per cent. With equities performing well this year, cash allocation has been lowered (compared to last year’s average).

Year-to-date (September 30, 2012) the high-performing sector indexes have been BSE Bankex (43.54 per cent), FMCG (36.48 per cent), Capital Goods (35.82 per cent), Realty (34.26 per cent), Consumer Durables (31.33 per cent) and Midcap (28.67 per cent).

Sector allocation- 2012

Sector

Jan-12 (%)

Sept -12 (%)

Raised/lowered allocation (%age points)

Auto Ancillaries

3.87

6.31

2.44

Banks

16.15

17.74

1.59

Media & Entertainment

2.79

3.46

0.67

Pharmaceuticals

7.29

7.69

0.40

Finance

4.41

4.77

0.37

Software

10.39

10.32

-0.07

Oil

3.68

3.57

-0.11

Auto

4.69

4.15

-0.54

Consumer Non Durables

11.27

10.16

-1.11

Petroleum Products

7.17

4.91

-2.27


All figures in %; as on Sept 30, 2012

The fund has raised its allocation decisively to auto ancillaries and banks and marginally to media and entertainment, pharmaceuticals, and finance. According to the co-fund manager, “We are positive on auto ancillaries because over the 10-year horizon some of the companies in this sector will show high secular growth trend. The key drivers in these companies are both original equipment and replacements. While the demand for OEMs (original equipment manufacture) is sluggish, replacement demand is reasonably better. The companies that we have been structurally positive about have also had a decent return on investment (ROI). Also, we are positive on banking because we see interest rates and inflation trending downwards at this point of time. We prefer high-quality private banks (such as ICICI, HDFC Bank and so on) and a few public sector undertakings.”

Among its top 10 holdings, the fund has reduced its exposure to petroleum products, consumer non-durables, auto, oil and software. According to Surana, “Oil and gas has not done well due to a few government-related issues and hence we are not positive on this sector.”

Fund versus index-September 2012
 

Sector Name

Fund Holding (%)

BSE200  (%)

Over/Under weight (%age pts.)

Media & Entertainment

3.45

0.68

2.77

Auto Ancillaries

3.64

0.94

2.7

Pharmaceuticals

7.9

5.44

2.46

Software

11.85

9.92

1.93

Oil

3.92

3.17

0.75

Petroleum Products

7.17

6.99

0.18

Consumer Non Durables

12.29

13.21

-0.92

Auto

4.27

6.26

-1.99

Finance

4.62

7.86

-3.24

Banks

14.77

18.3

-3.53


All figures in %; as on Sept 30, 2012

By the end of September, the fund was heavily over weight on media and entertainment, auto ancillaries, pharmaceuticals, software, and marginally on oil and petroleum products.

Among its top 10 holdings, the fund was decisively underweight vis-à-vis its benchmark index on banks, finance, auto and marginally on consumer non-durables.

Fund managers

The fund managers responsible for the performance of this fund are Gopal Agrawal and Neelesh Surana. Both these managers have been in charge of this fund since April 2008 (the time of its inception). Gopal Agrawal has over 12 years of experience in fund management and has been a fund manager with SBI Mutual Funds. Some other schemes co-managed by him are Mirae Asset India-China Consumption Fund and Mirae Asset Global Commodity Stocks Fund.

Neelesh Surana has over 17 years of experience in the financial services industry (including fund management) and has been associated with ASK Investment Managers. He individually manages Mirae Asset Emerging Bluechip Fund and co-manages Mirae Asset India-China Consumption Fund with Agrawal.

Conclusion

The fund has remained ahead of its benchmark in all the calendar years of its existence. The only year it gave negative returns was in 2011. However, even in that year it stayed well ahead of its benchmark BSE-200.
 
Mirae Asset India Opportunities has awarded its investors well for the risks they have faced in this fund.

Annexure: Interview with Neelesh Surana, co-fund manager, Mirae Asset India Opportunities Fund

Generally, how do you decide when a stock is to be sold?

While selling a stock a few things need to be considered. When the price rises and the price-value gap narrows, you sell that stock and book profit. Also, if the company or industry is undergoing some change, that will result in the value of the company being modified. This will affect the assumptions, which were made while buying the stock and might result in its sale.

What should be the profile of investors investing in this fund?

Investors with a medium- to long-term perspective, who want a diversified exposure along with good and consistent returns, should invest in our fund. We would like this fund to be a core holding in the investor’s portfolio as well. Also, as the fund has done well in all segments of the market, it can suit all types of investors, viz. conservative, moderate or aggressive. Ideally, investors with a three- to five-year horizon should consider investing in Mirae Asset India Opportunities fund.

Thought process and future approach

Until now, Mirae Asset India Opportunities has been in the first quartile, we want to maintain the consistency of this performance in the long term as well. Our endeavor will always be to generate strong relative and absolute returns and not take undue risk.

 
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