DSP BlackRock Equity Fund

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DSP BlackRock Equity Fund

DSP BlackRock Equity is a large-cap growth fund that was started in June 2007. Currently the fund has Rs 2,615.67 crore under management. It is benchmarked against the S&P CNX 500 Index.

Mandate and investment philosophy

The mandate of the fund is long-term capital appreciation by investing in a mix of large and mid-cap stocks, typically in the ratio of 50:50. According to Apoorva Shah, Executive Vice President and fund manager, DSP BlackRock Equity, "It is a blended fund that combines our Top 100 Fund and our Small- and Mid-cap fund."

The fund manager follows a mix of both top-down and bottom-up approach to investing. He invests in both growth and value stocks, depending on the market environment. The fund's investment style could best be described as growth-at-reasonable-price (GARP). Furthermore, the fund manager adheres to an active style of management.

Fund performance

	Scheme		YTD		3-yr		5-yr		Since inception
DSPBR Equity Fund(G)		33.26		6.71		3.10		10.94
S&P CNX 500		31.84		3.09		-2.39		--

All figures in %; as on December 31, 2012

In 2012, the fund gave a return of 33.26 per cent, thus managing to edge past its benchmark, which gave a return of 31.84 per cent. Explaining the fund's performance during the year, the fund manager says: "We suffered a setback during the year. Between April and June we lost a lot of points relative to the benchmark. It took us time to come back, which we eventually did."

The fund has also beaten its benchmark over the three- and five-year horizons. Since inception it has given its investors a compounded annual return of 10.94 per cent.

	Scheme		2012		2011		2010		2009		2008
DSPBR Equity Fund(G)*		33.26		-24.28		19.82		88.25		-50.36
S&P CNX 500*		31.84		-27.57		14.13		83.34		-57.36
Out/under performance**		1.41		3.29		5.69		4.91		7.00

*in %; in %age pts.

Next, let us turn to the fund's calendar year wise performance over the past five years to see if it has been consistent. The fund has the remarkable track record of having beaten its benchmark in each one of the last five calendar years (2008 to 2012). The margin of outperformance each year has not been very large except in 2008. Nonetheless, to have beaten the benchmark in each of the past five calendar years is an outstanding achievement.

Remarking on the fund's consistency, the fund manager says: "We have an active style and we adjust our portfolio from time to time. This imparts consistency to performance." On the shrinking margin of outperformance, he adds: "The market environment has been very challenging since the Lehman Brothers crisis. There have been several bear market rallies in the last few years which happened very rapidly and were difficult to catch. They had no fundamental basis. If you had a defensive portfolio, it would underperform during such rallies."

The fund has also provided sound downside protection to its investors. In both 2011 and 2008, when the markets were falling, the fund managed to decline less than its benchmark.Shah attributes this to his team's superior risk analysis and to the correct reading of the economic and market environment, which enabled him to position his portfolio to take advantage of those conditions.

Portfolio characteristics

Number of equity holdings. The fund currently holds 60 stocks in its portfolio. This is much higher than the median count of 42 for the diversified-equity category.

Between July 2007 and December 2012 the fund's stock count has averaged 74.94. Thus, even in the past the fund has always been true to its diversified character.

According to the fund manager, "In this fund we combine two funds to make one: the Top 100 Fund and our Mid- and Small-cap Fund in the ratio of 50:50. That is why the equity count is high."

Sector concentration.

			Top 3		Top 5		Top 10
DSPBR Equity Fund(G)		30.41		41.81		59.94
Median-diversified equity category		35.09		47.33		68.22

Figures in %

The fund's concentration in the top three, five and 10 sectors within its portfolio is lower than the median for the diversified-equity category.

Company concentration.

			Top 3		Top 5		Top 10
DSPBR Equity Fund(G)		12.47		20.03		33.66
Median-diversified equity category		18.17		27.01		44.69

Figures in %

The fund's concentration in the top three, five and 10 stocks within its portfolio is also lower than the median for the diversified-equity category.

Thus, going by the number of equity holdings, stock concentration and company concentration, the fund holds a well-diversified portfolio.

Turnover ratio.

According to the fund's latest portfolio disclosure, it has a turnover ratio of 218 per cent. This is almost three times as high as the median of 70.5 per cent for the diversified-equity category.

We have data on the fund's past turnover ratio from May 2008 to October 2012. Over this period, its turnover ratio has averaged 307.39 per cent. Thus, this fund has always had a high turnover ratio. Says the fund manager: "One reason for the high turnover is our active style of fund management. Generally large-cap stocks are fairly priced because they are more liquid and are well researched. You need to move from one stock to another to capture incremental news and analysis. That activity helps to capture the extra alpha. That is what we try to do. In case of midcap stocks in the portfolio, we follow a buy-and-hold approach. There we play for emerging themes where the unlocking of value takes longer."

Expense ratio. The fund currently has an expense ratio of 1.95 per cent. This is much lower than the median of 2.36 per cent for the diversified equity category. Provided a fund's returns are good, a lower expense ratio is a positive for investors.

Cash allocation. Over the past five years the fund's cash allocation has averaged 5.30 per cent. This is not too high (a cash allocation of 5 per cent or less is considered optimal). In 2012 the fund's allocation to cash averaged 2.11 per cent. A fund that remains fully invested in equities and does not have too high an allocation to cash does not run the risk of missing out on a sudden upturn in the market.

Risk.

			SD		Beta
DSPBR Equity Fund(G)		1.1292		0.7051
Median-diversified equity category		1.2130		0.7774

The fund's measures of risk (calculated over three years) are lower than the median for the diversified-equity category.

Risk-adjusted returns.

			Treynor		Sharpe
DSPBR Equity Fund(G)		0.1087		0.0679
Median-diversified equity category		0.0912		0.0564

Measures such as Treynor ratio and Sharpe ratio (also calculated over the past three years) indicate that the fund's risk-adjusted returns are marginally higher 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 -24.28 per cent, beating its benchmark by a handsome margin of 3.29 percentage points.

In 2011 the fund had an average exposure of 65.48 per cent to large-cap stocks, 20.24 per cent to mid-cap stocks and 7.84 per cent to small-cap stocks. The fund also had a 6.45 per cent allocation to the 'others' category, which included cash, futures, warrants and preference shares.

Even though the market was declining in 2011 the fund's allocation to cash averaged only 4.46 per cent. It stood at a peak of 10.65 per cent in February and thereafter declined to a trough of 2.29 per cent in May.

In 2011 only the BSE FMCG Index turned in a positive performance (9.27 per cent). All other sectors gave negative returns: BSE Healthcare (-13.20 per cent), BSE IT (-15.62 per cent), BSE Teck (-16.52 per cent), BSE Consumer Durables (-18.13 per cent) and BSE Auto (-20.30 per cent).

	Sector		January 2011 (%)		December 2011 (%)		Raised/lowered allocation (%age pts.)
Household & Personal Products		2.06		6.68		4.62
Engineering - Construction		0.27		3.97		3.7
Automobiles-Trucks/Lcv		2.78		6.01		3.23
Finance – NBFC		1.35		2.98		1.63
Fertilizers		2.85		4.21		1.36
Bank – Private		8.31		9.56		1.25
Refineries		4.78		4.84		0.06
Pharmaceuticals & Drugs		8.07		6.62		-1.45
Electric Equipment		5.19		2.43		-2.76
IT - Software		13.74		8.77		-4.97

In 2011 the fund raised its allocation to sectors such as household and personal products, engineering and construction, commercial vehicles, financial NBFCs and so on (see table above). Among its top 10 holdings the fund reduced its allocation to IT software, electrical equipment and pharma.

	Sector		Fund (%)		S&P CNX 500 (%)		Over/under weight vis-à-vis index (%age pts.)
Automobiles-Trucks/Lcv		6.01		2.24		3.77
Fertilisers		4.21		0.51		3.7
Household & Personal Products		6.68		3.35		3.33
Finance – NBFC		2.98		1.5		1.48
Electric Equipment		2.43		1.33		1.1
Pharmaceuticals & Drugs		6.62		5.57		1.05
Engineering - Construction		3.97		3.97		0
IT - Software		8.77		9.01		-0.24
Refineries		4.84		5.98		-1.14
Bank – Private		9.56		13.9		-4.34

Figures are for December 2011

By December 2011 the fund was overweight vis-a-vis its index on commercial vehicles, fertilisers, household and personal products, and so on (see table above). Among its top holdings, the fund was underweight vis-a-vis its benchmark on private banks, refineries and IT software.

Next, let us turn to the fund's stock allocations.

	Company Name		January 2011 (%)		December 2011 (%)		Raised/lowered allocation (%)
Hindustan Unilever Ltd.		1.01		4.91		3.9
Wipro Ltd.				3.12		3.12
Larsen & Toubro Ltd.				2.47		2.47
Tata Motors Ltd.		1.54		3.94		2.4
Kotak Mahindra Bank Ltd.		1.7		3.74		2.04
Cipla Ltd.		0.75		2.45		1.7
ICICI Bank Ltd.		3.26		4.21		0.95
Eicher Motors Ltd.		1.24		2.07		0.83
Tata Chemicals Ltd.		1.88		2.12		0.24
Bharat Petroleum Corpn. Ltd.		3.03		3.02		-0.01

During 2011 the fund raised its allocation to Hindustan Unilever, Wipro, Larsen and Toubro, Tata Motors, and so on. Among its top 10 holdings, the only stock to which the fund reduced its allocation was Bharat Petroleum Corporation.

	Company		Fund (%)		S&P CNX 500 (%)		Over/under weight vis-à-vis index (%age pts.)
Hindustan Unilever Ltd.		4.91		1.95		2.96
Kotak Mahindra Bank Ltd.		3.74		0.88		2.86
Bharat Petroleum Corpn. Ltd.		3.02		0.36		2.66
Wipro Ltd.		3.12		0.75		2.37
Eicher Motors Ltd.		2.07		0.1		1.97
Tata Motors Ltd.		3.94		2.01		1.93
Tata Chemicals Ltd.		2.12		0.24		1.88
Cipla Ltd.		2.45		0.79		1.66
Larsen & Toubro Ltd.		2.47		3.06		-0.59
ICICI Bank Ltd.		4.21		4.91		-0.7

Figures are for December 2011

By the end of the year the fund was overweight vis-a-vis its benchmark on Hindustan Unilever, Kotak Mahindra Bank, Bharat Petroleum, Wipro, Eicher Motors, Tata Motors, and so on. Among its top holdings, the stocks on which the fund was underweight compared to its benchmark were ICICI Bank and Larsen &Toubro.

2012.

In 2012 the Sensex was up 25.70 per cent; the BSE Midcap Index, 38.52 per cent; and the BSE Small-cap Index, 32.97 per cent.

The fund was up 33.26 per cent, marginally ahead of its benchmark, the S&P CNX 500 Index, which was up 31.84 per cent.

In 2012 the fund had an average allocation of 71.01 per cent to large-cap stocks, 19.95 per cent to mid-cap stocks and 5.02 per cent to small-cap stocks. In addition, it also had an average allocation of 5.02 per cent to the 'others' category.

The fund's average allocation to cash was a small 2.11 per cent (ranging from a maximum of 4.05 per cent in May to a minimum of 0.67 per cent in December).

	Sector		January 2012 (%)		December 2012 (%)		Raised/lowered allocation (%age pts.)
Bank – Private		9.77		15.59		5.82
Bank – Public		4.13		6.74		2.61
Finance – NBFC		3.68		6.19		2.51
Retailing		1.32		3.39		2.07
Textile		1.99		3.8		1.81
Diversified		1.82		3.47		1.65
Construction - Real Estate		1.69		3.24		1.55
Refineries		6.78		8.08		1.3
Engineering - Construction		3.93		4.23		0.3
IT - Software		7.06		5.21		-1.85

During 2012 the fund raised its allocation to private banks, public banks, financial NBFCs (thus positioning itself for an expected decline in interest rates), retailing, textile and so on (see table above). Among its top 10 sector holdings, the only sector to which the fund lowered its allocation was IT software.

On the sectors that he is bullish on, Shah says: "Banks and financial NBFCs will do well because the problem of non-performing assets (NPAs) has peaked. Moreover, with interest rates falling they will enjoy higher margins."

	Sector		Fund (%)		S&P CNX 500 (%)		Over/under weight vis-à-vis index (%age pts.)
Finance – NBFC		6.19		1.50		4.69
Textile		3.80		0.32		3.48
Retailing		3.39		0.26		3.13
Diversified		3.47		1.22		2.25
Refineries		8.08		5.98		2.10
Construction - Real Estate		3.24		1.28		1.96
Bank – Private		15.59		13.90		1.69
Bank – Public		6.74		5.11		1.63
Engineering – Construction		4.23		3.97		0.26
IT - Software		5.21		9.01		-3.80

Figures are for December 2012

By the end of 2012, the fund was overweight vis-a-vis its benchmark on sectors like financial NBFCs, textile, retailing, diversified, refineries and so on (see table above). Among its top 10 sector holdings, the only sector on which the fund was underweight was IT-software.

The fund is currently underweight on consumer staples and pharma. Elaborating on his outlook for these sectors, the fund manager says: "In these sectors price discovery has already taken place. Moreover, in future incremental growth will pose a challenge. In the case of consumer staples, the consumer is weighed down by inflation because the government has hiked the cost of electricity, diesel, petrol, and so on. Moreover, with the economy slowing down, income growth has slowed down, though it is still fine in rural areas. But we feel that on the strong base of the last few years, the excitement around the consumption theme will diminish in future. In case of the pharma sector, there are uncertainties arising from government policy." He further adds: "However, we don't expect a fall in these two sectors, only slower growth."

Next, let us turn to the fund's stock allocations.

	Company		January 2012 (%)		December 2012 (%)		Raised/lowered allocation (%age pts.)
IndusInd Bank Ltd.				3.71		3.71
HDFC Bank Ltd.				2.95		2.95
Pantaloon Retail (India) Ltd.				2.72		2.72
State Bank Of India		1.96		4.39		2.43
United Spirits Ltd.		0.85		2.87		2.02
Bharat Petroleum Corpn. Ltd.		2.73		3.85		1.12
Godrej Industries Ltd.		1.85		2.74		0.89
Eicher Motors Ltd.		2.05		2.35		0.3
Reliance Industries Ltd.		4.05		4.23		0.18
ICICI Bank Ltd.		6.37		3.85		-2.52

In 2012, the fund raised its allocation to stocks like IndusInd Bank, HDFC Bank, Pantaloon Retail, State Bank of India, and so on (see table above). Among its top 10 holdings, the only stock to which the fund lowered its allocation was ICICI Bank.

	Company		Fund (%)		S&P CNX 500 (%)		Fund vs index (%age pts.)
Bharat Petroleum Corpn. Ltd.		3.85		0.36		3.49
IndusInd Bank Ltd.		3.71		0.63		3.08
Godrej Industries Ltd.		2.74		0.1		2.64
Pantaloon Retail (India) Ltd.		2.72		0.11		2.61
United Spirits Ltd.		2.87		0.62		2.25
Eicher Motors Ltd.		2.35		0.1		2.25
State Bank Of India		4.39		2.32		2.07
Reliance Industries Ltd.		4.23		5.07		-0.84
ICICI Bank Ltd.		3.85		4.91		-1.06
HDFC Bank Ltd.		2.95		4.41		-1.46

Figures are for December 2012

By the end of 2012, the fund was overweight on stocks like Bharat Petroleum Corporation, IndusInd Bank, Godrej Industries, Pantaloon Retail, and so on. Among its top 10 holdings, the fund was underweight vis-a-vis its benchmark on HDFC Bank, ICICI Bank and Reliance Industries.

Fund manager

Apoorva Shah has been managing this fund since June 2006. Altogether he has 23 years of work experience. Since January 2009 he has been Executive Vice President, Investments, at DSP Blackrock Mutual Fund.

Conclusion

In our opinion, the fund rates highly owing to its consistency. An investor investing in such a fund is apt to enjoy a more restful ride compared to one who invests in a more volatile offering. Another of its strengths is diversification. Sometimes large-cap stocks outperform and sometimes midcaps. It's difficult to predict which category will outperform next. With this fund you can hedge your bets and enjoy the benefit of a rally in either category.

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