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SBI Magnum Global is a mid-cap growth fund which was started in September 1994. The fund currently has Rs 959.23 crore under management. It is benchmarked against the CNX Midcap Index. Investment philosophy and approach Fund manager R Srinivasan describes SBI Magnum Global as a mid-cap fund with a quality bias. The fund follows a bottom-up approach to stock selection. It invests at least 70 per cent of its portfolio in mid-cap stocks. Adhering to its quality philosophy, the fund focuses on businesses that have a strong competitive advantage, have consistently generated or are expected to generate high returns on capital and have growth potential. According to the fund manager, stock selection is guided by management quality (integrity and capability) and valuations (relative and absolute). About 30 per cent of the portfolio may be allocated to large-cap stocks to manage liquidity. Fund performance Scheme | YTD | 3-yr | 5-yr | Since inception | SBI Magnum Global Fund 94(G) | 35.98 | 11.26 | 0.17 | 18.21 | CNX Midcap | 39.16 | 4.59 | -1.56 | -- |
All figures in %; as on December 31, 2012 Year-to-date (December 31, 2012) the fund lags behind its index: while it is up 35.98 per cent, its benchmark is up 39.16 per cent. On the lag in YTD performance, the fund manager says: "The 'quality' bias in the portfolio, we have seen, leads to under-performance against the benchmark whenever market movements are sharp and short. Part of the YTD performance can be attributed to this. The fund, for instance, substantially under-performed the benchmark at the beginning of 2012 (January-February) also when the market saw a sharp upward move led by 'inferior' (stocks with questionable balance sheets) stocks." He goes on to defend the fund's philosophy of investing in quality stocks thus: "Our back-testing of the quality philosophy indicates decent out-performance over two-year periods, so we hope that next year will be much better." However, the fund is ahead of its benchmark over the three- and five-year horizons. According to the fund manager, the same reason that led to the under-performance in 2012 also explains the longer-term outperformance. He says: "Quality stocks or companies with good balance sheets have out-performed the market meaningfully in India and the rest of the world in the period following the Lehman crisis. Our bias towards this philosophy in all likelihood helped. In addition, better stock picking would have contributed to some excess return too." Since inception the fund has given its investors a handsome return of 18.21 per cent compounded annually. Scheme | 2011 | 2010 | 2009 | 2008 | 2007 | SBI Magnum Global Fund 94(G)* | -14.58 | 18.10 | 114.04 | -67.01 | 52.37 | CNX Midcap* | -31.47 | 19.16 | 94.85 | -60.23 | 76.93 | Out/under performance** | 16.90 | -1.07 | 19.18 | -6.78 | -24.56 |
*in %; **in %age pts. Next, let us turn to the fund's calendar year wise performance to see if it has been consistent. The fund has beaten its benchmark in only two of the previous five calendar years: 2011 and 2009. However, we should only be concerned about the performance since 2009, when the current fund manager took over. In those three calendar years, performance has been stellar. The fund beat its benchmark by wide margins of 19.18 percentage points and 16.90 percentage points respectively in 2009 and 2011. The underperformance in 2010 was marginal at -1.07 percentage points. Says the fund manager: "The out-performance, as mentioned earlier, can be attributed to superior stock selection and the 'quality' bias in the portfolio. The extent of out-performance is a function of a bottom-up approach with flexible sector active weight limits and an element of benchmark agnosticism. This, clearly, works both ways!" Does the fund provide sound downside protection to investors in a declining market? Under Srinivasan’s watch, the fund beat its benchmark by a wide margin in the declining market of 2011. According to the fund manager, "The fund is focused on downward protection as a conscious strategy which gels well with the bias on quality.” Portfolio characteristics Number of equity holdings. According to its latest portfolio disclosure, the fund currently holds 34 stocks in its portfolio. This is lower than the median for the diversified-equity category, which currently stands at 42. Over the last five years, the number of stocks in this fund’s portfolio has averaged 46.17. Thus, in the past the fund held a more diversified portfolio than it does currently. Since April 2011 the equity count in the fund's portfolio has declined to the 30s (barring one month, June 2011, when it was 41). Thus, in recent times the fund has moved towards a more compact portfolio. Says the fund manager: "I believe that 30-odd stocks provide adequate diversification for an equity portfolio and any further increase in stock count may not necessarily help." Sector concentration. | Top 3 | Top 5 | Top 10 | SBI Magnum Global Fund 94(D) | 23.16 | 32.87 | 49.64 | Median-diversified equity | 34.37 | 47.53 | 68.43 |
All figures in % The fund's concentration in the top three, five, and 10 sectors in its portfolio is lower than the median for the diversified-equity category, and that too by a considerable margin. Company concentration. | Top 3 | Top 5 | Top 10 | SBI Magnum Global Fund 94(D) | 12.35 | 19.32 | 35.76 | Median-diversified equity | 18.50 | 28.14 | 44.84 |
All figures in % The fund's concentration in the top three, five and 10 stocks in its portfolio is similarly lower than the median for the diversified-equity category, again by a considerable margin. According to the fund manager, "As an additional diversification tool, we have restricted active stock exposure to +/-5 per cent, which reduces the portfolio concentration. Currently, our top 15 stocks have a weight between 3 per cent and 4.4 per cent, the latter being the maximum." Thus, while the fund has moved towards a slightly more compact portfolio (with the number of equity holdings shrinking from the 40s to the 30s), it remains well diversified in terms of sector and stock concentration. Turnover ratio.According to its latest portfolio disclosure, the fund had a turnover ratio of 62 per cent. This is lower than the median of 70 per cent for the diversified-equity category. Historically, the fund's turnover ratio has been higher. We have data available from April 2008 to November 2012. Over this span of four years and seven months the fund's turnover ratio has averaged about 96 per cent. There has been a marked decline in the fund's turnover ratio since February 2011. In our view, the trend towards lower turnover ratio is a positive since it indicates that the fund manager has conviction in his stock selection and hence does not feel compelled to churn the portfolio heavily. Another positive arising from this is lower transaction costs. Says the fund manager: "On account of its philosophy, this fund follows a buy-and-hold approach and portfolio churn is low." Expense ratio. The fund currently has an expense ratio of 2.26 per cent. This is marginally lower than the median of 2.35 per cent for the diversified-equity category. Cash allocation. Over the last five years the fund has had an average cash allocation of 7.07 per cent. This is on the higher side (a cash allocation of 5 per cent or less being considered optimal). Over the last one year, however, cash allocation has averaged 6.23 per cent. Risk. | SD | Beta (Slope) | SBI Magnum Global Fund 94(D) | 0.8110 | 0.5306 | Median-diversified equity | 0.9673 | 0.7973 |
An examination of measures such as standard deviation and the beta (calculated over the last three years ending November 30, 2012) indicates that the fund has a lower level of risk than the median for the diversified-equity category. Risk-adjusted returns. | Treynor | Sharpe | SBI Magnum Global Fund 94(D) | 0.0621 | 0.0407 | Median-diversified equity | 0.0261 | 0.0210 |
An examination of measures such as Treynor ratio and Sharpe ratio (also calculated over trailing three-year period) indicates that the fund has a much higher level of risk-adjusted return than the median for the diversified-equity category. Portfolio strategy 2011. In 2011 the markets declined: the Sensex fell -24.83 per cent, the BSE Mid-cap Index fell-34.78 per cent, and the BSE Small-cap Index fell -43.63 per cent. The fund declined -14.58 per cent, beating its benchmark by a handsome margin of 16.90 percentage points. In 2011 the fund had an average allocation of 40.42 per cent to large-cap stocks. As the markets declined, the fund sought refuge in large-caps stocks, raising its exposure to these stocks from a minimum of 33.89 per cent in February to a maximum of 46.06 per cent in November. The fund had an average exposure of 34.89 per cent to mid-cap stocks. From a peak level of 41 per cent in August, exposure to these stocks was reduced to 27.87 per cent in December. The fund had an average exposure of 16.77 per cent to small cap stocks during the year. The fund began the year with an exposure of 29.07 per cent to small caps in January. This fell to 7.16 per cent in July and was raised again to 24.08 per cent in December. The fund also had an average exposure of 7.93 per cent to the "others" category. In the declining market of 2011, as is customary, the fund's allocation to cash averaged a high 7.93 per cent, ranging from a minimum of 4.51 per cent in January to a maximum of 16.59 per cent in May. We shall not examine the fund’s sector allocation strategy since it primarily follows a bottom-up approach to stock selection. Company Name | January 2011 (%) | December 2011 (%) | Raised/lowered allocation (%age pts.) | Muthoot Finance Ltd | | 4.39 | 4.39 | Ultratech Cement Ltd. | | 4.25 | 4.25 | DiviS Laboratories Ltd. | | 3.39 | 3.39 | Greaves Cotton Ltd. | | 3.09 | 3.09 | Page Industries Ltd. | 3.22 | 4.37 | 1.15 | CRISIL Ltd. | 2.32 | 3.25 | 0.93 | MRF Ltd. | 3.77 | 4.54 | 0.77 | Blue Dart Express Ltd. | 3.45 | 3.81 | 0.36 | Redington (India) Ltd. | 5.3 | 4.25 | -1.05 | Bosch Ltd | 4.4 | 3.12 | -1.28 |
In 2011, the fund raised its allocation decisively to Muthoot Finance, Ultratech Cement, Divi's Laboratories, and so on (see table above). It raised its allocation marginally to companies like Page Industries, Crisil, MRF and Blue Dart. Among its top 10 holdings, the two stocks to which the fund lowered its exposure during the year were Bosch and Redington. Company Name | Fund (%) | CNX Midcap (%) | Over/under weight vis-à-vis index (%age pts.) | Muthoot Finance Ltd | 4.39 | | 4.39 | Page Industries Ltd. | 4.37 | | 4.37 | Ultratech Cement Ltd. | 4.25 | | 4.25 | Redington (India) Ltd. | 4.25 | | 4.25 | Blue Dart Express Ltd. | 3.81 | | 3.81 | MRF Ltd. | 4.54 | 0.96 | 3.58 | CRISIL Ltd. | 3.25 | | 3.25 | Bosch Ltd | 3.12 | | 3.12 | Greaves Cotton Ltd. | 3.09 | | 3.09 | Divi’s Laboratories Ltd. | 3.39 | 2.19 | 1.20 |
Figures are for December 2011 By December 2011, the fund was overweight vis-a-vis its benchmark on MRF and Divi's Laboratories. The fund's benchmark agnosticism is evident from the fact that eight of its top 10 stock holdings were from outside the benchmark index. According to the fund manager, "We believe benchmarking is not a great strategy to follow in a mid-cap fund." On the performance of 2011, the fund manager says: "The performance in 2011 may be attributed chiefly to stocks like Page Industries, Blue Dart, Crisil, Bosch and Redington." 2012. Year-to-date (December 31, 2012) the Sensex is up 25.70 per cent, the BSE Mid-cap Index is up 38.52 per cent and the BSE Small-cap Index is up 32.97 per cent. Year-to-date (December 31, 2012) the fund is up 35.98 per cent, lagging behind its benchmark which is up 39.16 per cent. In 2012 the fund's allocation to large-cap stocks averaged 45.10 per cent (starting from 43.84 per cent in January, declining to 40.65 per cent in July, and rising again to 46.96 per cent by November). Last year the fund’s allocation to mid-cap stocks averaged 35.37 per cent (ranging from a minimum of 31.05 per cent in January, going up to 41.85 per cent in October, and then declining again to 36.5 per cent in November). In 2012 the fund’s allocation to small-cap stocks averaged 13.28 per cent (ranging from a minimum of 6.41 per cent in March and rising to a high of 18.05 per cent in August, before declining again to 9.84 per cent in November). The fund has also had an allocation of 6.25 per cent to the "others" category during the year. Company | January 2012 (%) | November 2012 (%) | Raised/lowered allocation (%age pts.) | Shriram City Union Finance Ltd. | | 3.40 | 3.40 | Karur Vysya Bank Ltd. | | 3.24 | 3.24 | DB Corp Ltd. | | 3.21 | 3.21 | Amara Raja Batteries Ltd. | 2.16 | 4.05 | 1.89 | Supreme Industries Ltd. | 2.34 | 3.28 | 0.94 | Cadila Healthcare Ltd. | 3.01 | 3.84 | 0.83 | Bajaj Holdings & Investment Ltd | 2.75 | 3.31 | 0.56 | Sadbhav Engineering Ltd. | 3.37 | 3.48 | 0.11 | Muthoot Finance Ltd | 4.61 | 4.46 | -0.15 | Page Industries Ltd. | 3.86 | 3.49 | -0.37 |
In 2012, the fund raised its allocation to Shriram City Union Finance, Karur Vysya Bank, DB Corp, Supreme Industries, and so on (see table above).Among its top 10 holdings, it lowered its allocation to Page Industries and Muthoot Finance. Company Name | Fund (%) | CNX Midcap (%) | Over/under weight vis-à-vis index (%age pts.) | Muthoot Finance Ltd | 4.46 | | 4.46 | Amara Raja Batteries Ltd. | 4.05 | | 4.05 | Page Industries Ltd. | 3.49 | | 3.49 | Sadbhav Engineering Ltd. | 3.48 | | 3.48 | Shriram City Union Finance Ltd. | 3.4 | | 3.4 | Bajaj Holdings & Investment Ltd | 3.31 | | 3.31 | Supreme Industries Ltd. | 3.28 | | 3.28 | DB Corp Ltd. | 3.21 | | 3.21 | Cadila Healthcare Ltd. | 3.84 | 1.42 | 2.42 | Karur Vysya Bank Ltd. | 3.24 | 1.65 | 1.59 |
Figures are for November 2012 By the end of November 2012, the fund was overweight vis-a-vis its benchmark on Karur Vysya Bank and Cadila Healthcare. Eight of its top 10 stock holdings were from outside the benchmark index. According to the fund manager, "Amara Raja, Eicher Motors and MRF are the top three positive attributors so far this year. In addition to the negative attribution on the average cash level of about 6 per cent, stocks that have done badly for us include Redington, Greaves Cotton, Cox and Kings, Indraprastha Gas and FDC.” Fund manager R. Srinivasan has been managing this fund since May 2009. Altogether he has 16 years of work experience. Before joining SBI Mutual Fund, he worked for Future Capital Holdings, the asset management and financial services arm of Future Group. Prior to that assignment, he had also worked with PNB AMC and with Oppenheimer. Srinivasan also manages SBI Magnum Emerging Businesses Fund (very good track record), SBI Magnum Equity Fund (good track record), SBI Magnum Balanced Fund (average track record) and SBI Magnum Contra Fund (below-average track record). Conclusion Since the change of fund manager in 2009, the performance of this fund has picked up markedly. As for who should invest in this fund and why, the fund manager says: “Anecdotally, I am tempted to think that a good part of the investing community is more concerned about downward protection in a falling market and they are probably okay if there is marginal under-performance in a very positive market, provided that there is out-performance over time. This fund is good for these kinds of investors. It is also a nice mid-option between a large-cap and a mid-cap strategy given that the fund provides higher beta by being mid-cap but at the same time cuts risk due to its focus on quality.” Based on the current fund manager’s track record and the fund’s quality orientation, it deserves your investment.
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