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Citrus Analysis: SBI Magnum Equity: Stable performer
Mon, Nov 12, 2012
Source : Shoaib Zaman, Citrus Interactive

SBI Magnum Equity is large-cap growth fun. Currently it has assets under management worth Rs 806.70 crore. The fund was started in November 1990 and is benchmarked against the S&P CNX Nifty. The fund invests only in the top 100 stocks of the BSE by market capitalisation.

Investment Strategy

On the fund’s investment approach, R Srinivasan, the fund manager says: “One, it is a pure large-cap fund that invests only in large-cap stocks. Large caps are defined as the top 100 companies in terms of market cap rank. Two, we do not attempt to be an outlier and aim for the fund to be in the lower end of the first quartile or the upper end of the second quartile. Accordingly we ensure a minimum benchmark coverage and have relatively tight sector and stock limits. Three, the fund is fairly concentrated at about 25-odd stocks.”

The fund manager further adds: “Magnum Equity's focus is on consistency of performance against the benchmark.”

On the constraints imposed on the fund manager by the fund’s mandate, Srinivasan said:“The fund manager is not allowed to invest in mid-cap names and has to run a minimum benchmark coverage of 50 per cent with sector active limits of 6 per cent and stock active limits of 4 per cent. The tracking error target is between 4 to 6 per cent.”

Fund performance

Year-to-date (October 30, 2012) the fund has given a return of 22.45 per cent, ahead of its benchmark, the S&P CNX Nifty, by a margin of 0.92 percentage points.

Scheme Name

1 Year

3 Years

5 Years

10 Years

YTD

SINCE INCEPTION

SBI Magnum Equity Fund(D)

7.88

8.67

1.32

24.85

22.45

12.47

S&P CNX Nifty

5.49

6.04

-0.97

19.46

21.53

14.04

Average

8.87

8.04

0.77

23.85

25.63

Oct 30, 2012, performance in %, CAGR

It has also beaten its benchmark over the one-year, three-year, five-year, and 10-year horizons. Since inception the fund has given a compounded annual return of 12.47 per cent over a 22-year period.

Scheme Name

2006

2007

2008

2009

2010

2011

2012*

SBI Magnum Equity Fund(D)

51.26

71.17

-56.24

84.84

18.35

-19.69

22.45

S&P CNX Nifty

39.83

54.77

-51.84

71.46

17.95

-24.62

21.53

Category Average

37.39

60.22

-55.92

82.13

19.45

-24.34

25.63

Oct 30, 2012, performance in %

Of the last six calendar years (2006-2011), the fund has beaten its benchmark in all years except 2008 when it trailed its benchmark by 4.40 percentage points. In 2009 the outperformance was by a high margin of 13.39 percentage points.

The fund did offer downside protection to its investors when the markets declined in 2011, though it failed to do so in 2008.

Year-to-date the fund is trailing behind the category average by 3.18 percentage points.

Portfolio characteristics

Benchmark. The fund’s benchmark was changed from BSE 100 to S&P CNX Nifty in 2011. Though the fund's investment universe didn't change, its strategy did. According to Srinivasan, “The fund changed from being predominantly large cap to a pure large-cap fund.”

Number of equity holdings. The fund currently holds 26 stocks in its portfolio. This is much lower than the median for the diversified-equity category, which currently stands at 41.

Over the past five years, the fund has always had a concentrated portfolio with the number of equity holdings averaging 29.65. Over this period the average number of holdings for the diversified-equity category has never dipped below 35. The minimum number of stocks that the fund has held at any point is 24 in June 2012.

Sector concentration.

Top 3 Sector Holdings

Top 5 Sector Holdings

Top 10 Sector Holdings

SBI Magnum Equity Fund(D)

49.51

63.91

87.93

Median

41.09

56.61

78.78

All figures in %; as in Sep-2012

When one examines the fund's concentration in the top three, five and 10 sectors, one finds that it is far higher than the median for the diversified-equity category. This is in keeping with our observation above that the fund runs a concentrated portfolio.

Company concentration.

Top 3 Holdings

Top 5 Holdings

Top 10 Holdings

SBI Magnum Equity Fund(D)

24.15

36.59

59.38

Median

18.54

27.65

45.45

All figures in %; as in Sep-2012

In case of company concentration as well, the same pattern is evident. The fund’s concentration in the top three, five, and 10 stocks in its portfolio is higher than the median for the diversified-equity category.

On portfolio concentration, Srinivasan says: “The portfolio has a minimum of 25 stocks, which, in our view, is good enough for diversification. The concentration must be looked at from the perspective of the benchmark which also happens to be fairly concentrated.”

Turnover ratio. According to its latest portfolio disclosure (September 2012), the fund had a turnover ratio of 148 per cent, about double that of the category average of 73 per cent.

Since 2011, the fund's portfolio turnover has averaged 162 per cent. Thus, the fund's turnover ratio tends to be on the higher side. Says the fund manager: “The turnover ratio is a function of a relative return strategy based on a one-year perspective.”

Expense ratio. The fund has an expense ratio of 2.05 per cent, which is 29 basis points lower than the median for the diversified-equity category. A lower expense ratio is a positive for investors.

Cash allocation. The fund has had an average cash allocation of 6.57 per cent over the last three years. If we take an allocation of 5 per cent to cash as a reasonable level (many fund houses regard this as their upper limit), then this fund's cash allocation tends to be marginally on the higher side.

The fund's maximum allocation to cash over the last three years was 12.11 per cent in January 2012.

Risk measures.

Beta

Standard Deviation

SBI Magnum Equity Fund(D)

0.81

0.97

Median-diversified equity category

0.8

1

On risk measures such as beta and standard deviation, the fund's figures hover around the median for the diversified-equity category.

Risk-adjusted returns.

Sharpe

Treynor

SBI Magnum Equity Fund(D)

0.02

0.02

Median-diversified equity category

0.02

0.02

On measures of risk-adjusted return such as Sharpe ratio and Treynor ratio, the fund’s figures are equal to the median for the diversified-equity category.

Thus, as far as risk and risk-adjusted returns go, the fund occupies the middle ground within its peer set.

2011. In 2011 the markets declined: the Sensex fell -24.64 per cent, the BSE Mid-cap Index fell -34.18 per cent, and the BSE Small-cap Index fell -42.61 per cent. The BSE 100 Index fell -25.73 per cent. The fund fell -19.69 per cent, thus managing to beat its index by 4.49 percentage points.

The fund began the year with an allocation of 90.86 per cent to large-cap stocks. This was marginally reduced to 87.57 per cent by the end of the year. The fund's allocation to large-cap stocks averaged 90.51 per cent during the year.

The fund's allocation to mid-cap stocks has been minimal, averaging 1.08 cent during the year. In fact from February 2011 to May 2011 it had no exposure to mid-cap stocks. The fund does not invest in small-cap stocks at all.

The fund began the year with a cash allocation of 7.03 per cent. This rose to 11.04 per cent in May. The fund ended the year with a higher cash allocation of 9.15 per cent. Its cash allocation for 2011 averaged 7.36 per cent.

In 2011 only the BSE FMCG Index turned in a positive performance (9.53 per cent). All the other sectors gave negative returns: BSE Healthcare (-12.82 per cent), BSE IT (-15.72 per cent), BSE Teck (-16.46 per cent), BSE Consumer Durables (-16.87 per cent) and BSE Auto (-20.46 per cent).

On his stock and sector bets during the year, Srinivasan says: “During CY2011, our overweight on healthcare and underweight on industrials and materials paid off. In terms of individual stocks, positive contribution came from being overweight on Coal India and Bosch and underweight on Larsen & Toubro.”

Changes in fund's sector allocation during 2011

Sector Name

%Holding Jan-2011

%Holding Dec-2011

Raised/lowered exposure (%age pts.)

Auto

6.93

6.93

Pharmaceuticals

6.38

9.79

3.41

Petroleum Products

5.37

8.48

3.11

Finance

2.16

4.08

1.92

Telecom – Services

3.17

4.38

1.21

Oil

4.43

4.46

0.03

Minerals/Mining

4.06

3.07

-0.99

Banks

20.87

19.87

-1.00

Consumer Non Durables

9.00

7.31

-1.69

Software

15.04

12.92

-2.12

As in Sep 2011

During the year the fund increased its allocation to auto sector from nil at the start of the year to 6.93 per cent by the end. It also increased its allocation to pharmaceutical and petroleum products. It decreased its exposure to software and consumer non-durables (see table above).

Changes in fund's company allocation during 2011

Company Name

Jan-2011 (%)

Dec-2011 (%)

Raised/lowered exposure (%age pts.)

Reliance Industries Ltd.

6.59

6.59

Dr Reddys Laboratories Ltd.

3.29

3.29

Tata Consultancy Services Ltd.

2.53

4.58

2.05

Bharti Airtel Ltd.

3.17

4.38

1.21

ITC Ltd.

3.95

5.14

1.19

ICICI Bank Ltd.

6.68

6.99

0.31

Infosys Ltd.

8.32

8.34

0.02

Coal India Ltd.

4.06

3.07

-0.99

State Bank Of India

7.05

4.88

-2.17

HDFC Bank Ltd.

7.14

3.86

-3.28

As in Sep 2011

In terms of companies, the fund raised its allocation to Reliance Industries in 2011. At the start of the year the fund had nil exposure to the company and by the end of the year it stood at 6.59 per cent. Similarly, the fund decisively increased its exposure to Dr Reddy’s Labratories. Stocks to which the fund reduced its exposure decisively in 2011 were HDFC Bank and SBI (see table above).

Fund vis-à-vis index, Company wise

Company Name

Fund (%)

S&P CNX Nifty (%)

Overweight/ underweight (%age pts.)

Bharti Airtel Ltd.

4.38

1.79

2.59

Dr Reddys Laboratories Ltd.

3.29

1.20

2.09

Infosys Ltd.

8.34

6.37

1.97

Coal India Ltd.

3.07

1.25

1.82

State Bank Of India

4.88

3.22

1.66

Tata Consultancy Services Ltd.

4.58

3.70

0.88

ICICI Bank Ltd.

6.99

6.74

0.25

Reliance Industries Ltd.

6.59

7.53

-0.94

HDFC Bank Ltd.

3.86

6.42

-2.56

ITC Ltd.

5.14

8.71

-3.57

As in Sep 2011

By the end of the year, the fund was overweight in stocks such as Bharti Airtel, Dr Reddy’s Laboratories, and so on (see table above). Among its top 10 holdings, itwas underweight vis-à-vis its index in ITC (by 3.57 percentage points), HDFC Bank (by 2.56 percentage points) and so on.

2012.

Year-to-date (October 31, 2012) the BSE Sensex is up 19.74 per cent, the BSE Mid-cap Index is up 27.86 per cent, and the BSE Small-cap Index is up 25.92 per cent. The fund is up 22.45 per cent, 0.92 percentage points ahead of its benchmark.

The fund began the year with an allocation of 84.83 per cent to large-cap stocks. This had been upped to 94.48 per cent by September. So far this year the fund has had an average allocation of 90.40 per cent to large-cap stocks—about the same level as last year.

In the mid-cap space, the fund had some exposure between January and March. From April the fund had no exposure to this market segment. It had no exposure to small-cap stocks throughout the year.

The fund's cash allocation, which stood at 13.46 per cent at the beginning of the year, had been reduced to 5.52 per cent by September.

Year-to-date the best-performing sector indexes are BSE FMCG (40.94 per cent), BSE Healthcare (29.80 per cent), Bankex (41.45 per cent), Consumer Durables (31.28 per cent), and Capital Goods (34.66 per cent).

Shift in sectoral allocation during 2012

Sector Name

Jan-2012 (%)

Sep-2012 (%)

Raised/lowered exposure (%age pts.)

Banks

20.64

26.83

6.18

Consumer Non Durables

4.59

7.30

2.70

Software

10.14

12.84

2.69

Construction Project

2.42

4.28

1.86

Finance

3.97

5.01

1.03

Petroleum Products

9.43

9.85

0.42

Telecom – Services

4.12

4.23

0.11

Oil

4.96

4.90

-0.05

Auto

7.79

5.60

-2.18

Pharmaceuticals

10.53

7.10

-3.43

As in Sep 2012

The fund has decisively increased its allocation during the year to banks, consumer non-durables, and software. During this period it has decreased its allocation to pharmaceuticals, a defensive sector, the most—from 10.53 per cent to 7.10 per cent. Other sectors where it has decreased are auto and oil.

According to the fund manager, “In 2012 we have seen positive attribution from being overweight on financials and underweight on IT and materials.”

On the underperformers in the market, the fund manager says: “Presently, we are meaningfully under-weight in metals and consumer staples: metals for fundamental reasons related to demand destruction and the problems in China, and consumer staples based purely on valuations.”

Shift in company allocation during 2012

Company Name

Jan-2012 (%)

Sep-2012 (%)

Raised/lowered exposure (%age pts.)

HDFC Bank Ltd.

3.93

9.89

5.96

HCL Technologies Ltd.

3.73

3.73

Housing Development Finance Corporation Ltd.

1.93

5.01

3.07

ITC Ltd.

4.59

7.30

2.70

Larsen & Toubro Ltd.

2.42

4.28

1.86

Bharti Airtel Ltd.

4.12

4.23

0.11

State Bank Of India

5.50

5.59

0.09

Reliance Industries Ltd.

7.20

6.97

-0.23

Infosys Ltd.

6.20

5.54

-0.65

ICICI Bank Ltd.

8.15

6.85

-1.30

As in Sep 2012

Among stocks, the fund has decreased its allocation to ICICI Bank and Infosys. Allocation to HDFC bank and HCL Technologies has been increased. The fund manager has chosen to make fresh investments in HCL Technologies.

Fund versus index-stock wise

Company Name

Fund (%)

S&P CNX Nifty (%)

Overweight/underweight (%age pts.)

HDFC Bank Ltd.

9.89

6.42

3.47

HCL Technologies Ltd.

3.73

0.86

2.87

Bharti Airtel Ltd.

4.23

1.79

2.44

State Bank Of India

5.59

3.22

2.37

ICICI Bank Ltd.

6.85

6.74

0.11

Reliance Industries Ltd.

6.97

7.53

-0.56

Larsen & Toubro Ltd.

4.28

4.85

-0.57

Infosys Ltd.

5.54

6.37

-0.83

Housing Development Finance Corporation Ltd.

5.01

6.42

-1.41

ITC Ltd.

7.30

8.71

-1.41

As in Sep 2012

By the end of September, the fund was overweight vis-à-vis its index on HDFC Bank, HCL Tech, Bharti Airtel, and so on. Among its top 10 holdings, four companies are from the financial space: HDFC bank, State Bank of India, ICICI Bank and Housing Development Finance Corporation which together account for over 25 per cent of the fund (see table above).

According to the fund manager, “In 2012, so far stock wise the key contributors have been Shriram Transport, HCL Tech and SBI.”

Fund Manager

The fund is managed by R Srinivasan who is the head of equities at SBI Mutual Fund. He has been managing this fund since May 2009. Prior to joining this fund house, he worked with Future Capital Holdings and Oppenheimer and Company.

Besides SBI Magnum Equity, some of the other equity funds that he manages include SBI Magnum Emerging Businesses, SBI Magnum Global 94, and SBI Magnum Contra.

Conclusion

This pure large-cap fund with a concentrated portfolio aims for stable returns vis-a-vis its benchmark. The fund has been successful in delivering results that are in accordance with its mandate. It will not deliver top-of-the-chart performances, but neither will it underperform badly. If you are looking for a steady performer for your core portfolio, do consider this fund as one of the prospects.

 
 
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