Taste the Difference

In a way, these exotic funds tend to bridge the gap between a diversified equity fund and a sectoral fund. Diversified equity funds usually don8217;t put all their eggs in one basket while sectoral funds concentrate on just a single sector. Speciality funds are between these two with their selective diversification.

One category of speciality funds are funds that invest in cyclical stocks. The basic premise here is that as economy goes through business cycles of boom and bust, various sectors respond differently in each of the phases. As a savvy investor, if you want to reap the benefits of changing business cycles or a play in MNCs or PSUs, these exotic funds could be an excellent option.

Universe of Speciality Funds: In India till now, the evolution of speciality funds has been driven more by the sweeping changes in the economic structure than by the changes in business cycle.

To benefit from the liberalisation process, UTI Mastergrowth, the first speciality fund, was launched in February 1993. Its theme flexibility to invest up to 50 per cent of the assets in PSU stocks was a novelty at that time. A year later, exports became the key thrust area and CanBank Mutual Fund launched CanExpo to invest in export-oriented units and companies with forex earnings. In 1993-94, came the biggest IPO boom and more than 1,000 IPOs hit the market.

Taurus Discovery Stock then called Taurus Newshare and UTI Primary Equity Fund were two funds that promised to reap benefits from IPO boom. Then, expecting a turnaround in the core sectors like power, infrastructure, steel and cement led to the launch of a core-sector fund8212;Prudential ICICI Power.

Then MNCs came in the limelight after 1998. All this gave birth to four MNC funds, funds favouring out-of flavour stocks like Magnum Contra, and the ones carrying the cyclical theme such as Alliance Basic Industries. UTI launched three speciality funds UTI MNC, UTI Brand Value and UTI Service Sector Fund. Sun F038;C Resurgent India Equity fund brought another unique idea to the table-of catching companies on the verge of a turnaround, merger or restructuring.

How They Have Fared: Though all these funds carry a unique investment idea, their stock universe is not very different. The malady that has affected the broader market, affects these stocks too. Besides, the change in the dynamics of underlying themes has also been the key determinant. And then, of course, astute fund management skills also play a role. Based on these parameters, very few of the speciality funds have emerged to be winners since their inception.

Take CanExpo. Its initial focus on FMCG, healthcare, services and textiles as a part of its exports theme kept it in the limelight for three successive years. But during the tech boom, the fund refocussed on software, which has become the new export star. Learning harsh lessons from the sharp fall in returns, the fund has moved away from tech to healthcare, financial services and energy.

Taurus Newshare, launched at the peak of IPO boom, was saddled with plenty of junk stocks, became Taurus Discovery Stock and changed its focus to invest in turnaround stocks. UTI PEF came late and has largely stuck to large-cap stocks.

UTI Mastergrowth focuses on PSU stocks. It stuck to PSUs, though the allocation had come down in favour of technology and FMCG stocks by 1998-99. While those two sectors could not help it gain much, the PSU exposure paid off well post-9/11, when PSU stocks gyrated to the top. It gained 20 per cent in 2002 and is up another 8 per cent in 2003 till June 10. Today, this well-diversified portfolio has a 38 per cent allocation to PSU heavyweights.

Since FMCG and healthcare funds do not have impressive performance recently, the fund managers has started hunting for MNC names in sectors like engineering and technology. However, among the four of them only K MNC and Birla MNC are MNC funds in the true sense. The lull in the FMCG and healthcare sector has also affected the performance of UTI Brand Value and Alliance Buy India. While Brand Value8217;s objective of investing in valuable brands has landed it with FMCG stocks, Alliance Buy India has a specific mandate of investing in consumer and healthcare sectors.

However, one category that is doing well now are cyclical old economy stocks on stronger performance.

Should You Own a Speciality Fund? Indeed yes, variety is the spice of life. But do assess whether you really need them. Your current portfolio may already be spread across the same sectors that you wish your speciality fund to invest in. If that is not the case and you are confident about the prospects of a theme, you can take a call. But then remember that these funds should have a supplementary role in your investments and form only a small part of your portfolio around 10-15 per cent and some of theses may just be suited as an opportunistic avenue than a long-term.