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S. Vaidya Nathan

INVESTORS in the Alliance Equity Fund can stay with the fund for now. They can evaluate exit options a few months down the line once the benefits of the ongoing portfolio consolidation take effect. This may also enable investors to capitalise on any broad-based improvement in stock prices.

The Alliance Equity portfolio was ravaged by redemptions in the January-March quarter. The speculation about Alliance Capital's imminent exit from India was the proximate cause for the sharp fall in asset base.

In this period, the net assets fell about 32 per cent. The NAV was down 8.8 per cent, indicating the magnitude of outflows. This forced a massive churning in the portfolio. The changes are considerable, even for an aggressively managed fund such as Alliance Equity.

Asset and returns' shrinkage: This is by far the largest decline in the asset base of any open-end equity scheme of a private sector equity fund. Not surprisingly, the scale of redemption has taken a toll on performance.

For the last six months, the fund figures among the first 25 per cent of schemes in terms of returns. But for the last three months, it has slipped up badly and moves down in the rankings list to lie among the laggards.

Alliance Equity provides a good example of what large redemption can do to investors who stay on. Of course, US-64 and a few other UTI schemes have gone through such a phase. But, then, UTI was a massive in-house operation with large-scale inter-scheme transfers. So it is not too easy to zero in on how big-ticket redemption affected the investment strategy.In Alliance Equity, sector preferences appear to have been clearly affected by redemption pressures. The glaring example is its paring of exposures in banking stocks such as Punjab National Bank, HDFC Bank, SBI and ICICI Bank.

These large-cap exposures provided liquid avenues to raise cash. At the same time fresh exposures were built up in other banking stocks, such as Canara Bank, Bank of Baroda and Jammu & Kashmir Bank. On a net basis, banking sector exposures moved up by three percentage points.

Amid the problems faced due to redemption, the encouraging pointer is the evidence of stock selection in a few cases (for instance, the bank stocks that have entered the portfolio and stocks such as Hero Honda and Vesuvius, which moved out) in a few cases.

This, coupled with the rally in finance and engineering and the aggressive trading approach of the fund, accounts for its improved performance in the last month and a half.

If this trend continues, investors may be able to benefit from an improved showing. This may at least neutralise the damage done in end 2002 and the first quarter of 2003. But fresh investments can be avoided till stability emerges in the investment strategy and performance.

Handling the quarter: An interesting aspect is that Alliance has remained more or less fully invested in equities, even in a period when redemption cheques had to be written out in large numbers. The idea of having sizeable cash appears to have been given the go-by. This aggressive style has probably helped ride the uptrend in the banking stocks to an extent. Stocks with high liquidity have borne the brunt of the selling pressure. This includes a long-time Alliance favourite — HDFC Bank, often cited as a good holding for a 20 year kind of a period. In this stock, exposures have been cut by 55 per cent.

Exposures in stocks such as Dr Reddy's Labs, Tata Engineering, ITC, Cipla, Hindustan Petroleum, Punjab National Bank and Container Corporation have been pared by levels ranging from 30 per cent to 61 per cent.

Stocks where the fund has sold out fully also fall in the high liquid category with the exception of Vesuvius. Exposures were completely ICICI Bank, Hero Honda, Sun Pharma and Reliance Industries are the stocks where exposures have been completely cut.

Given the price trends in these stocks (with the exception of Hero Honda which has been on a steady decline), the fund would have managed to cut its holdings without suffering too much of an impact cost.

The Table show the list of stocks that have been on the selling list of Alliance Capital. In 38 out of the 49 stocks held, exposures have been reduced to generate cash for meeting redemption requests.

For perhaps the first time since its launch in 1998, Alliance Equity has an IT sector exposure of less than 20 per cent. At the end of March IT holdings accounted for 17 per cent of net assets.

For a fund that has been very aggressive and bullish on IT sector all along, this is a significant change.

That the portfolio has not been rebalanced to counter the lower prices and lift the IT sector weight is also notable.

The fund has stepped up exposures to stocks such as BHEL, SBI and Jammu & Kashmir Bank.

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