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Thematic funds in sectors such as FMCG, pharmaceuticals and banks dominated the equity fund rankings for 2010 runningahead of the broader market. The tiny Magnum FMCG Fund is perched at the top of the rankings as the best performing equity fund for the year, thanks to its focus on mid-sized FMCG companies that have enjoyed a massive re-rating on the bourses. Investors can hold the fund as prospects for FMCG companies in the year ahead remain good, buoyed by pay hikes for the urban salaried class that should help the demand for FMCGs and a good monsoon and higher NREGA payments that should keep rural consumption ticking. However, valuations in the sector are at a stiff premium over markets and investors should not expect an encore of 2010 returns.
Limit exposure
It may be ideal to cap the fund weight at 10 per cent of the portfolio or less for two reasons. One, after their stellar returns in the past year and given their high valuations, FMCG stocks may not qualify as defensive investment bets. They may be as prone to market correction as other stocks. Two, the Magnum FMCG Fund's small size and focus on mid-sized companies in the sector make it more prone to declines linked to the market.
Numbers and portfolio
For the year 2010, Magnum FMCG Fund's 48 per cent return effortlessly bettered the Sensex's 18 per cent. The fund also managed to trounce most of its peer group of sector funds, with the Franklin FMCG Fund coming closest to it, with a 37 per cent return.
Where the fund scored over peers was in its ability to cherry-pick stocks. Owing to its small size, the fund could stay with a compact portfolio of between just 5 to 15 stocks through the year, an advantage given the limited universe of FMCG stocks.
In fact, the fund started out the year with just half a dozen stocks in its portfolio; big weights of 28 per cent in ITC, 22 per cent in Nestle and 13 per cent in GSK Consumer took care of over half of the stock choices in March 2010. As FMCG stock prices rose, the fund stayed with its top picks even as it added more stocks to diversify its portfolio.
The additions included less known FMCG names such as Eveready, Pidilite and Agro Tech Foods along with Hindustan Unilever, Dabur and P&G Hygiene.
The more diversified profile makes the portfolio less vulnerable to any underperformance by the top stocks.
One-year returns apart, the Magnum FMCG Fund's five- and three-year returns have, however, just about matched the Sensex return. .
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