Affair with software continues… - Views on News from Equitymaster

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Affair with software continues…

Jun 22, 2000

Fund managers continue to buy into software like there’s no tomorrow. The rationale behind this obsession stems from the fact that no single sector is expected to grow as explosively as software. A study of sector allocations conducted by personalfn.com reveals that fund managers across a range schemes, (diversified growth, equity-linked tax saving, balanced) have taken large exposure to software. (We have only included growth schemes and not IT schemes in this study. Moreover, we have only included schemes with over 35% exposure to software).

Growth Schemes Nature Date of holding % Holding NAV (Rs)
Canexpo Growth 31 Mar,2000 73.2 21.5
Tata Tax Savings ELSS 30 Apr,2000 73.0 16.9
Canpep 1993 ELSS 31 Mar,2000 71.3 24.1
Birla Balance (Gr) Balanced 31 Mar,2000 65.0 12.8
Birla Advantage Fund Growth 31 Mar,2000 65.0 47.7
JM Equity Fund (Gr) Growth 31 May,2000 52.0 12.8
Canganga Balanced 31 Mar,2000 48.5 12.3
DSP ML Opportunities (Gr) Growth 31 May,2000 47.4 10.8
Tata Young Citizens Growth 30 Apr,2000 47.0 11.7
Alliance Equity Fund (Gr) Growth 31 May,2000 44.4 43.3
Tata Pure Equity Growth 30 Apr,2000 41.0 15.3
Zurich(I) Equity (Gr) Growth 30 Apr,2000 39.5 22.4
JM Balanced Fund (Gr) Balanced 31 May,2000 38.0 17.9
K 30 Growth 16 Jun,2000 37.8 21.5
Cantriple Balanced 31 Mar,2000 37.5 21.9
Unit Scheme-1995 (Gr) Balanced 3 Jan,2000 37.5 200.6
Zurich (I) Top 200 Growth 31 Mar,2000 36.6 17.3
Sun F & C Value (Gr) Growth 30 Apr,2000 36.0 24.7
DSP ML Equity Fund Growth 31 May,2000 35.9 20.8
Magnum Balanced Fund Balanced 6 Jan,2000 35.0 17.9

Right at the head of the table we have Canexpo with a 73.2% software allocation i..e close to 3/4th of the fund’s net assets. Not too far behind are Tata Tax Savings (73.0%), Canpep 1993 (71.3%), Birla Advantage (65.0%). All these are diversified growth funds. But the diversification is conspicuous by its absence. Investors who had entered these funds looking for a well-rounded portfolio may want to have a word with the fund managers here.

The story’s no different with balanced funds. We have Birla Balance with a 65% software exposure, Canganga (48.5%) and JM Balanced (38.0%). The software allocations are very high even by the standards of a pure vanilla growth fund, let alone a balanced fund. The imbalance over here could make some investors lose their mental balance.

There seems to be an urgent need for a review of software allocations. Any growth fund that has taken over 35% exposure to software is asking for a lot unwanted volatility in its net asset values (NAV). In a falling market, it is also asking for a lot of outflows, redemption pressures, cash crunch – basically everything that a fund manager can do without.

Ideally any balanced fund with a 60-40% equity-debt break-up should be looking at a software exposure of below 30%. Anything above that would change the nature of the balanced fund significantly.

There can be no two opinions on the fact that there is life beyond software. The FMCG and pharma sectors hold a lot of promise, although by no means are either comparable to software. But that should not stop fund managers from looking at them, even if it calls for a slow-down in their affair with software.

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