Investors who are enamored by thematic funds (especially infrastructure funds) must not lose sight of the fact that diversified equity funds (which include opportunities funds) can make aggressive sectoral/thematic calls. More importantly, they can exit the sector/theme when valuations peak; this is something thematic funds cannot do because they are bound by their mandates to remain invested in the theme regardless of the valuations.
Equity Funds: Thematic vs Diversified
DSP ML Opportunities Fund, one of the oldest equity funds to pursue the opportunities style of fund management, is a leading fund from the diversified equity fund segment. Its impressive showing across the risk and return parameters over varying time frames and market cycles is noteworthy.
What DOF offers
DOF, an offering from DSP ML Mutual Fund is an open-ended, opportunities style fund. Launched in May 2000, the fund invests between 80 per cent -100 per cent of its corpus in equities while the rest (upto 20 per cent) can be held in debt/money market instruments. It pursues the growth style of investing by identifying companies that provide long-term capital growth opportunities from across the market and sectors.
Given its fluid investment style, the fund has an edge over regular diversified equity funds when it comes to investing aggressively in investment opportunities (most diversified equity funds can take moderate bets as opposed to the aggressive bets that opportunities funds can take). To that end, DOF is ideally suited for investors with an aggressive risk appetite.
How DOF fares vis-à-vis its peers
|
|
NAV |
1-Yr |
3-Yr |
5-Yr |
Std. |
Sharpe |
|
ICICI Pru Dynamic Plan (G) |
91.28 |
34.3 |
55.5 |
50.7 |
6.69 |
0.41 |
|
Franklin India Opportunities (G) |
38.23 |
38.9 |
53.2 |
50.6 |
8.19 |
0.38 |
|
DSP ML Opportunities (G) |
87.51 |
52.8 |
53.0 |
59.0 |
6.58 |
0.43 |
|
HSBC India Opportunities (G) |
43.08 |
43.9 |
50.8 |
- |
7.32 |
0.40 |
|
Principal Resurgent (G) |
112.59 |
50.0 |
44.8 |
53.5 |
6.04 |
0.43 |
|
S&P CNX Nifty |
|
45.6 |
45.4 |
40.4 |
|
|
(Source: Credence Analytics. NAV data as on January 16, 2007.)
(Standard Deviation highlights the element of risk associated with the fund. Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument)
For the purpose of peer comparison, we have considered funds with a similar investment proposition that have been in existence for atleast 3 years.
DOF's NAV (net asset value) delivers a competitive performance over the 3-Yr period (53.0 per cent CAGR). Over 5-Yr, its NAV has appreciated by 59.0 per cent CAGR. Its performance over 1-Yr (which is not the best time frame for evaluating equities) is just as notable (52.8 per cent). Although, ICICI Pru Dynamic Plan (55.5 per cent CAGR) and Franklin India Opportunities (53.2 per cent CAGR) have outperformed DOF over the 3-Yr time frame they have been comprehensively outperformed over the other time frames. Moreover, when compared to DOF, their performance falters on the risk-return parameters (more on that later).
It is noteworthy that DOF has successfully outperformed its benchmark index i.e. S&P CNX Nifty across the 1-Yr, 3-Yr and 5-Yr time frames.
Volatility
With a Standard Deviation of 6.58 per cent, DOF has an impressive showing on the volatility control front. This means that the fund has exposed investors to lower risk levels vis-à-vis peers. Among peers, Principal Resurgent (6.04 per cent) pitches in the best performance, while Franklin India Opportunities (8.19 per cent) fares the worst.
Risk-adjusted return
Sharpe Ratio is a measure of the returns delivered by the fund per unit of risk borne. DOF (Sharpe Ratio 0.43 per cent) and Principal Resurgent (Sharpe Ratio 0.43 per cent) are the best performers, whereas Franklin India Opportunities (Sharpe Ratio 0.38 per cent) has posted the most dismal performance.
As can be seen in the graph, DOF has outperformed its benchmark i.e. S&P CNX Nifty over the long-term. Rs 100 invested in DOF on inception would be worth approximately Rs 942.8 at present; whereas an investment in the benchmark index would have yielded only Rs 441.1.
Fund management approach
DOF belongs to a fund house that is known for its process-driven investment approach.
The fund house has well-defined investment processes in place which ensure two things
a) the fund delivers a predictable performance across market cycles and b) it is not overly dependent on any individual (read fund manager) for its success. The performance of funds like DSP ML Top 100 (a large cap fund) and DSP ML Equity Fund (a value-style fund) and DSP ML Balanced Fund under various fund managers bear testimony to this fact.
What should investors do?
Now the big question - should an investor consider investing in DOF? Well, that would depend on his risk appetite, investment objective and existing portfolio, among a host of other factors. At Personalfn, we have always maintained that a 'one size fits all' approach doesn't work while investing. An investment avenue that is apt for one investor could be grossly unsuitable for another. Therefore, investors would do well to consult their investment advisors/financial planners to determine the suitability of DOF in their portfolios.
