Subtle Differences

Both ABN Amro Future Leaders and ICICI Pru Emerging Star focus on small stocks. Yet the differences in portfolios are glaring.

Mid- and small-cap stocks are bringing a smile to everyone's face. For this reason we decided to compare two funds - ABN Amro Future Leaders and ICICIPru Emerging Star - both of which are heavy on such stocks.

Though Emerging Star defines its mandate as investing in diversified mid-cap stocks, it has a very broad definition of mid cap. The mid-cap universe includes any stock that has a market capitalization between Rs 100 crore and Rs 2,000 crore.

Future Leaders, on the other hand, is not that precise in its objective. The fund will focus on high growth stocks in the mid- and small-cap segment. The fund will look for companies that offer opportunities for long-term growth and are driven by dynamic style of management and entrepreneurial flair.

Going by the above objectives, it's not surprising to find that both keep switching between mid and small caps quite frequently. For example for the last four months (August- November 2007), Emerging Star had been a mid cap fund. But prior to this, for another four months it had small-cap heavy portfolio (April 2007 to July 2007). Future Leaders started out as a mid cap offering in April 2006 but changed its complexion to small caps by April 2007. It remained a small cap-heavy fund for another two months and then was again back to its mid-cap orientation.

While both funds vary their complexion quite frequently, they are both currently focused on reducing their large-cap exposure. Large caps, which were seen in small quantities in Emerging Star till September this year, are nowhere to be seen now. The Future Leaders fund has quite drastically lowered it large-cap exposure from over 16 per cent (August 2007) to less than 7 per cent (November 2007).

Emerging Star comes across as the much more focused option if one goes by its objective and allocation to equity. It permits a maximum 10 per cent exposure to debt and the same for cash. But Future Leaders has the leeway to touch its cash exposure to 35 per cent and the same holds for debt. But despite being more focused, Emerging Star was always the more diversified option with a huge portfolio. But it is moving more towards the style of Future Leaders in its concentration of portfolio. Emerging Star has consciously and gradually worked on reducing the number of stocks from 70 (November 2006) to 44 (November 2007). If you thought 70 was too large, you should note that they had 81 in May 2006. Future Leaders has maintained the portfolio at more of less 30-35 stocks since October 2006. Of course, they too have started off with as many as 50 stocks in the portfolio. Both have negligible amounts in cash.

But once you begin to look at the portfolios, all similarities end. At first blush, it appears that both their preferences for technology are identical. After all, it is the top sector in each portfolio accounting for 20 per cent of the assets. But dig a little deeper and a different picture emerges. Emerging Star's conviction in technology has not diminished reduced and the fund has maintained this level of concentration in the sector for the past one year. But Future Leaders has cut down on technology and added financial services along the way. Technology formed over 30 per cent and financial services 4 per cent of the Future Leader's assets in September 2007. Now, financial services accounts for over 18 per cent and technology has dropped to 20 per cent (November 2007). Emerging Star has taken a diametrically opposite stance and sold all of its financial services in October and November.

Future Leaders also has a preference for basic/engineering (17.26 per cent) and healthcare (9.76 per cent) but Emerging Star tilts towards metal and metal products (15.27 per cent), services (14.27 per cent), construction (13.37 per cent) and basic/engineering (8.29 per cent).

Long-term holdings in ICIC Pru Emerging Star include stocks like Sintex Industries, Subex Azure, Orient Paper and Deccan Chronicle but Future Leaders sticks with Elecon Engineering and Phoenix Lamps. In fact, the difference in their investment philosophy is quite stark from the fact that both have only two stocks in common.

The differences don't only exist in their portfolio but also in their assets. Emerging Star has seen its assets rise over the past three years to over Rs 889 crore. But Future Leaders has seen a dip from Rs 589 crore (May 2006) to Rs 98.38 crore (November 2007). The reason for these fluctuations in assets is probably a lot to do with their performance.

Barring two instances, Emerging Star has always beaten the category average, sometimes by a huge margin, in a surging market. The two instances were in the September quarters of 2006 and 2007. While the equity diversified category's returns September 2006 quarter stood at 15.73 per cent, the fund's return was marginally less at 14.83 per cent. In September 2007 quarter was bad for the fund. It generated returns of just over 5 per cent when the category's returns were at 14 per cent. But it remains to be seen how this fund proves itself in a falling market. For example, in second quarter of 2006 when the markets lost heavily, though the fund beat its benchmark CNX Nifty Junior, it lagged behind the category average. In this period the fund had lost over 16 per cent compared to the category's loss of 13.5 per cent. Similarly, in the first quarter of 2007, the fund was neither able to beat the category nor its benchmark.

On the other hand, ABN Amro, which is relatively a new fund, is yet to show its brilliance. In its short history it has been able to beat the benchmark (CNX Mid Cap) and the category average only once. That was in the December 2006 quarter when the fund's 17.19 per cent return was much better than that of its benchmark (10.83 per cent) and the category average (11.37 per cent). Unfortunately, in the first quarter of 2007, Future Leaders lost by more than 10 per cent, underperforming the category average and the benchmark. It will have to put up better numbers to increase its assets.

(by valueresearch)