Searching for an optimal mix

FUND TREND

Optimix Multi Manager fund churns its fund portfolio just as much as any other actively managed fund. Any guess how it fared?

While the returns delivered by the Optimix Income Growth Multi Manager Fund of Funds (OIG FoF) has not exactly topped the charts, it has matched the average returns given by funds with a similar asset allocation for the three month period ending July.

The fund comprises two plans with an equity allocation of 15 and 30 per cent. Barring July, the 15 per cent plan has delivered returns that compare well or have exceeded the average returns given by Monthly Income Plans (MIPs) which follow a similar asset allocation.

The fund fell 1.9 per cent, marginally higher than the 1.7 average fall in MIPs in May, but its returns at 0.6 per cent exceeded the maximum return from MIPs at 0.4 per cent in June.

Is that a good record for an FoF? Perhaps not. Though it is understandable that a FoF of this kind may not be a top performer given its limitation of investing in a basket of fund schemes, one would expect that the scheme consistently mimics the average performance of funds in the top quartile. In that sense, the fund's performance so far has been conflicting.

The Optimix portfolio
OIG FoF is a mix of several mutual funds bundled into one single scheme and has an actively-managed portfolio that dynamically manages weights between equity and debt components.

They are managed by different mutual funds, which are the best-of-breed in their respective category. This enables Optimix to bring the best-of-both categories into one single product.

OIG FoF's 15 per cent equity plan invests approximately 15 per cent of its net assets in equity funds (maximum exposure 20 per cent) and 30 per cent equity plan invests about 30 per cent in equity funds (maximum exposure 35 per cent). The balance amount in both cases is invested in debt funds, liquid funds, money market funds and money market securities.

Portfolio analysis of the two plans, as of July 30, 2006 tells us that they had invested about 10 per cent in equity. When the 30 per cent equity plan can invest more in equity what has stopped it from doing so?

Also its performance was not as good as its 15 per cent equity plan. In May, the 30 per cent plan has given a negative return of 3.8 per cent while the average MIP return has been a negative 1.7 per cent. Its July performance has been worse. It has given a negative return of 0.7 per cent against an average MIP returns of 0.02 per cent.

Justifying the poor performance, Mugunthan Siva, CIO, Optimix, the multi-manager division of ING Investment Management (India) says, "We keep changing allocation based on our view on the market. Initially, in July, we had increased our allocation to equities thinking that the markets would rally on the back of good results. But due to global risks such as crude prices and inflation, markets sentiments turned negative, so we had to cut our equity exposure. When we reduced our exposure, the markets started rising so our performance was affected." 
 

RETURN SWINGS
Performance (%)	May' 06	Jun' 06	Jul' 06
OIG FOF (15 per cent equity plan)	-1.90	0.60	-0.02
OIG FOF (30 per cent equity plan)	-3.80	0.30	-0.70
Average MIP Returns	-1.70	-1.10	0.02

Investment parameters
Explaining his investment philosophy, Siva says that a top-down approach for selecting funds works best for his portfolio.

He considers various factors like the global environment, its effect on India, view on the equity market, whether value strategy will work or growth among others. Siva also considers various qualitative and quantitative factors.

"When we pick funds we give 33 per cent weightage to quantitative factors and 67 per cent to qualitative factors," he says. Optimix sends a due diligence questionnaire to all AMC's to gauge their quality.

"We try to find out about their investment process, quality of the team and duration of the investment team. Further, we see whether the investment team relies solely on one person or team work."

On the quantitative side, Siva checks the fund's historical performance. "But that is not the only criteria as different funds perform well in different markets," Siva adds. Explaining this, he gives the example of Templeton India Growth Fund (TIGF), a diversified equity fund.

He says, "I picked this fund in April despite knowing that its performance was not up to the mark. I picked it up because I expected markets to be volatile for the next 3 to 6 months. As this fund has a large cap value bias I felt it is an appropriate and safe fund to invest in such volatile markets."

This proved to be a good bet as TIGF has delivered 3.74 per cent return as against a category return of 1.37 per cent over the past three months. He however, adds, "If market volatility reduces then we may exit from this fund."

Siva manages his fund portfolio just as actively as any active fund manager would manage his portfolio of stocks. If he has a view that a particular category may not perform well then he exits the fund altogether or reduces its weightage.

Siva cites the example of Sundaram Midcap Fund which he bought in the beginning of May and sold at the end of the month. Again, in May, since markets were volatile and risk was high, Siva felt that mid caps would underperform as investors flee to safer havens.

But he says, "We have again bought this fund as mid caps have been doing well since August and I expect them to continue to outperform."

Diversify to de-risk
A diversified portfolio is not limited to funds that manage stocks but is a strategy adopted by FoFs as well. Siva too tries to maintain a diversified portfolio of funds which includes a growth fund, a value fund and an index fund among others. So, if one of these categories fail to perform then he can gain from the other and hence the performance of the fund as a whole will not be affected.

"We try to have an exposure to everything but based on our views we change the weightage," says Siva. The OIG FoF portfolio consists more of debt than equity.

"Till July we were investing in liquid funds but now we have started investing in bond funds of low duration as risks have reduced and the payoff of investing in bond funds have improved. The 8 per cent yield in bond funds is more attractive than the 6 per cent yield of liquid funds," says Siva.

Though the performance of Optimix has been middling so far, it may not be wise to pass a judgement on the fund manager just yet as the fund has a very brief history. For now, investors can keep a close track of the Optimix portfolio to see on which manager the manager-of-managers is betting on.