Apr 13, 2008

Mutual Fund - Sundaram BNP Paribas Select Focus Fund : Analysis

Sundaram BNP Paribas Select Focus: Invest thru SIP

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Recent market declines may offer a good opportunity for investors to acquire exposures to frontline stocks in the listed space. Those looking to do so can consider investing in the Sundaram BNP Paribas Select Focus Fund.

Despite a sharp reversal in this fund's NAV during the recent market correction (down 28 per cent from the January peak), the fund remains among the top performers in its peer group of large-cap funds, based on one year returns.

It also sports a good 3 and 5-year return record. However, investing through the systematic route may be a better course to follow with this fund, as this may help the investor take full advantage of volatility in the market as well as in the fund's NAV.

Suitability: With the bulk of its holdings in stocks with a market capitalisation of over Rs 10,000 crore, Sundaram Select Focus may carry lower volatility of returns than funds with a flexicap approach or those with big allocations to mid-cap stocks.

Recent market events have reinforced some of the risks associated with mid-caps in terms of high intra-day volatility, high impact cost and the drying up of liquidity during a corrective phase.

However, the fund does carry a higher degree of risk when compared to large-cap funds such as the Franklin India Bluechip or HDFC Top 200 Fund, given its much higher Beta (tendency of returns to swing relative to the market). This has been compensated through its much higher returns over 1 and 3-year time frames.

Performance: After taking a significant knock in the recent corrective phase (28 per cent fall from peak NAV against 22 per cent fall in Nifty), Sundaram Select Focus's one-year returns stand at about 39 per cent. This compares favourably with other funds with a large-cap focus; it also places the fund near the top of the diversified category for a one-year time frame.

The fund's relative underperformance during the correction can be attributed to its focussed exposure in sectors such as energy, financials and metals (top performers earlier) as well as its significant holdings in the Reliance pack, which have borne the brunt of the recent decline.

With valuations in some of these stocks correcting to more reasonable levels, they may hold the potential to participate in a recovery.

The fund was nearly fully invested in end-December, making the NAV more vulnerable to the corrective phase. However, it appears to have booked profits on part of its portfolio soon after the start of the corrective phase and closed January with a 18 per cent cash position in its portfolio.

Cash balances remained high in February suggesting that the fund continued to wait for more attractive valuations before deploying its funds. The high cash position may limit the fund's ability to ride an upside, in the event of a sharp or quick rally in the equity market. In the latest quarter ending February, the fund has pared exposure to sectors such as electrical, engineering and media while adding to exposure in pharmaceuticals, housing finance and fertilisers.

HDFC, GAIL, PNB and IOC are some of the key additions to the portfolio, while Lanco Infratech, IDFC and BHEL were among the main exits.