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Money > Mutual funds > Fund news May 17, 2001 |
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Diversified equity funds get back to basicsAabhas Pandya Just a year after participating in the funeral of "diversification", it is back to basics for leading equity fund managers. The growing realisation that diversification is the best, if not the only, way to reduce risk is visible today with leading equity funds now diversifying their portfolios -- reducing stock weightage and increasing sector spread. No surprise here, for the new order is being built around the demolition of technology stocks. The same funds were gung-ho on the ICE sector in 2000 and had jettisoned diversification in pursuit of bounty profits. Well, with portfolios mired in steep losses, fund managers seem to have realised that fund investment is not about short-term gains but for long-term sustained performance. Diversification is the basic tenet for investments in the stock market or any other asset class. Simply put, it means not putting your eggs in one-basket, spreading risk across securities and building the portfolio with varying blocks. The truth is that stocks and sectors are "consumed" and hence, rotate as investors' preferences change. Well, with most diversified equity funds investing their assets in technology, the plunge from the top was only a matter of time. Had the portfolios been well spread out, the losses on technology could have been offset with gains on other sectors since different fundamentals and risks govern different sectors. On the other hand, unrelated diversification with marginal holdings is also not good for funds. But that's a different story. With funds now embracing diversification with alacrity, we ran a quick check on the portfolios of top equity funds. The average tech exposures for April is at 22 per cent, down from 62 per cent in March last year. For instance, Birla Advantage has pruned its holdings from 70 per cent to fewer than 15 per cent for the same period; it is down from 71 per cent to 30 per cent for Alliance Equity. While a part of it came down due to the erosion in valuation, funds have also aggressively sold tech stocks since the beginning of the current calendar. The concentrated investment in individual holdings is also down, with fund managers cutting dependence on a handful stocks. The top 10 stocks in Magnum Multiplier Plus now make up only 45.5 per cent of the portfolio, down from 74 per cent in March last year. It has been a hard lesson for both fund managers and investors since early 2000. While funds are now spreading their investments, it is still early days to confirm that the new order will stay. For, it may just be a fad and could fade away the moment some other sector emerges with glittering returns. "The change in outlook for technology is not permanent and we remain strong votaries of the technology sector," says a die-hard fund manager, whose badly bruised fund of 2000 stands well-diversified today. Needless to say, after the latest bout of concentrated investments leading to sharp losses, it will now take many years before we can say with surety - that a fund is committed to diversification. As many fund managers would have realised by now, diversification is easy to preach but hard to practice. But no matter what your view on market efficiency is, you can still argue that widespread diversification is the best policy. The human ego being what it is, it's all too easy to convince ourselves that we are an Abby Joseph Cohen or a Warren Buffett, able to spot great investments. Humility counsels us that no, we are not that good, and would be better off hedging our bets through diversification.
Down the hill...
Source: Value Research
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