The fund’s recent change in investment strategy is a step in the right direction, as it complements the manager’s inherent strengths.
Manager Sailesh Raj Bhan has managed Reliance Top 200 (erstwhile known as Reliance Equity Advantage) since its inception in Aug 2007, when it was run as a pure-play large-cap fund. The approach then involved investing only in the top 100 stocks by market cap. Also, the fund’s sector weights were firmly aligned with that of the benchmark index’s weights. Despite the limitations, the fund still managed to beat 64% of its large-cap peers during this period, but the strategy put considerable strain on the manager to execute it.
The investment approach was changed in Aug 2011 to address the limitations, and a more flexible approach was adopted. The fund’s investment universe was expanded to the top 200 companies by market cap, thereby allowing investments in mid-caps, which now account for roughly 30% of assets. Although the portfolio’s sector weights are still loosely aligned with those of the benchmark index BSE 200, the fund now takes bigger sector deviations than it previously did, so long as its tracking error vis-à-vis the BSE 200 index is low. As of April 2012, Bhan’s big bets in the health-care (12% vs 6% for BSE 200), technology (16% vs 11% for BSE 200), and energy sectors (15% vs 10% for BSE 200), among others, typified this approach. We also note that the manager has done away with taking cash calls, which is a positive in our view. Overall, we think the changes in the strategy are positive as they provide the manager sufficient flexibility to maneuver the portfolio, and also complement his investment style.
Bhan is an experienced portfolio manager, backed by solid research experience. His ability to choose fundamentally sound stocks and understand long-term trends is impressive. He puts strong emphasis on fundamental research when choosing stocks, wherein he looks for issues that have good growth prospects and healthy/rising ROEs. However, his qualitative filter means that only companies that have sustainable business models, strong management teams, and durable competitive advantages make the cut. Bhan also pays heed to the macroeconomic scenario, taking sector bets based on his views.
We note that Bhan’s new strategy is more risky than the earlier one, given the larger deviations from the benchmark index in terms of stock/sector picks and the increased small/mid-cap exposure. However, we believe the research-intensive approach and the caliber of the investment team are well suited to such moves. We also draw comfort from the fine execution of similar broad-based strategies Bhan plies at other funds he runs for the fund house. In light of the above factors, we assign the fund our Bronze rating.