Sunday, 23 November 2008

Magnum Emerging Businesses: Switch

Investors can consider exiting Magnum Emerging Businesses (MEB) Fund. The fund has consistently underperformed its benchmark BSE 500 during rallies as well as downturns such as the present one. Its aggressive positioning in the mid- and small-cap category may not be the best of strategies in the current environment.

Historical performance also suggests that the fund has not adequately compensated investors for the high risks undertaken. On a year-to-date basis, the fund’s NAV declined by 69 per cent - 13 percentage points more than its benchmark.

Suitability: Apart from companies with domestic growth opportunities, MEB seeks to invest in companies that are at a nascent stage in terms of growth or those with an export orientation or with outsourcing opportunities and also globally competitive corporates.

The theme appears riddled with uncertainties in the current scenario for the following reasons:

One, with global economies under the grip of slowdown/recession, companies with export markets or outsourced businesses could face relatively tougher times.

Two, small/emerging companies with aggressive growth strategies are often the most hit during difficult macro-economic and business conditions. Investors, too, tend to walk over to more mature businesses that can handle shocks better and bounce back quickly.

Investors can consider exiting their holdings in the fund and enter diversified funds such as HSBC Equity or HDFC Top 200. Magnum Contra is another option for those who prefer to switch to a scheme within the same fund house.

Performance: MEB kicked off with a quick phase of out-performance in 2004 and a good part of 2005, but struggled later on to decisively beat its benchmark. The periods of out-performance have been short-lived and marginal. The fund witnessed one of its best quarters in September 2005, earning 40 per cent in three months.

However, the mid-cap meltdown in late 2005 and the ensuing broader correction in 2006 was the beginning of distressing times ahead.

The fund’s three-year compounded annual return at -14 per cent as against the benchmark return of -2 per cent, speaks of the significant underperformance.

The fund’s inconsistency is also reflected in its monthly rolling return, where it beat the benchmark less than 50 per cent of the times since inception in September 2008. The monthly returns also suggest that while the margin of underperformance has been wide, the out-performance, especially over the last three years, has occurred only by a thin margin (couple of percentage points).

With a high exposure to currently underperforming sectors such as construction, engineering and power equipment, the fund’s NAV took deep cuts from the correction that began in January 2008.

While a number of mid-cap funds too have suffered sharp losses, MEB has declined steeper than mid-cap funds such as HSBC Midcap or Kotak Midcap as a result of its sector bets.

The fund held about 25 per cent in industrial manufacturing sector and 20 per cent in construction and related sectors as of October 2008.

With only about 9 per cent in cash and debt and very little exposure to relatively market-neutral sectors/stocks, the fund is relatively less hedged in the current market.

Source: TheHinduBusinessLine

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DISCLAIMER: The author is not a registered stockbroker nor a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments.