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Fundamentals lose out to momentum - Views on News from Equitymaster
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  • Jul 10, 2000

    Fundamentals lose out to momentum

    In the recent past the markets have witnessed a flurry of activity in certain ‘frontline’ stocks – Himachal Futuristic (HFCL), Global Tele, Satyam, and Zee Telefilms. These stocks have been branded as momentum stocks and have turned out to be the cornerstone of many a mutual fund portfolio.

    Fund managers seem to be going with the momentum, and in the process fundamentals have taken a backseat. So while Global Tele, Satyam HFCL and the likes have occupied the front rungs of the portfolio, stocks, strong in fundamentals (but weak in momentum) - HDFC, Gujarat Ambuja, Tata Engineering, have been relegated to the last few rungs, if at all.

    In a study, we at personalfn.com, have taken two stocks in both categories to drive home our point. So we have Gujarat Ambuja Cements, the most efficient Asian cement manufacturer, and HDFC, the country’s largest housing finance company as representative of the fundamentals group and HFCL, one of the largest telcab players, (tainted in the telecom bidding process), and Global Tele, a telecom major, as representative of the momentum group. (Needless to say just two companies in each category may not give us a conclusive picture, but results are definitely indicative).

    The list below highlights the holdings of several funds in Gujarat Ambuja Cements or HDFC.

    Fund Date of holding % Holding NAV (Rs)
    Alliance Basic Ind. (Gr) 28 Apr,2000 10.3 9.44
    Templeton Growth Fund 31 May,2000 7.7 13.71
    UTI Sector-Brand Value 31 Mar,2000 7.2 10.22
    Tata Pure Equity 30 Apr,2000 4.9 15.08
    Zurich(I) Tax Saver 31 May,2000 4.8 19.82
    Morgan Stanley Growth 31 Mar,2000 4.5 16.44
    GIC Growth Plus II 31 Mar,1999 3.9 18.95
    Unit Scheme-1992 31 Mar,2000 3.4 19.98
    Sundaram Growth 5 May,2000 3.2 15.30
    Unit Scheme-1995 (Gr) 3 Jan,2000 3.2 188.45

    (The above list is not comprehensive and is only a sample)

    Compare to this the holding of HFCL or Global Tele across several fund portfolios and we begin to realise why these stocks have been labeled as momentum stocks.

    Fund Date of holding % Holding NAV (Rs)
    UTI Sector-Service Sector 31 Mar,2000 21.6 33.99
    Magnum Taxgain 1 Jun,2000 14.2 30.64
    Mastergrowth 1993 31 Mar,2000 13.7 21.34
    Magnum Multiplier Plus 1993 1 Apr,2000 13.1 22.68
    Alliance Monthly Inc.(Gr) 31 Jan,2000 11.9 12.79
    Alliance Equity Fund (Gr) 31 May,2000 9.6 40.33
    Magnum Balanced Fund 1 Apr,2000 9.4 17.17
    Alliance Monthly Inc.(Gr) 31 Jan,2000 9.2 12.79
    Alliance New Millenn (Gr) 28 Apr,2000 9.2 9.45
    Grandmaster 1993 31 Mar,2000 9.2 10.73
    IL&FS Gr & Val (Gr) 31 Jan,2000 9.1 16.09
    UTI Sector- Software 31 Mar,2000 8.3 24.74
    Alliance New Millenn (Gr) 28 Apr,2000 7.4 9.45
    Pru ICICI Tech. (Gr) 30 Jun,2000 6.7 6.45
    Pru ICICI Growth (Gr) 30 Jun,2000 6.6 24.65
    Unit Scheme 1964 31 Mar,2000 6.2 NA
    Grandmaster 1993 31 Mar,2000 6.0 10.73
    Pru ICICI Tax (Gr) 30 Jun,2000 6.0 14.22
    Alliance Equity Fund (Gr) 31 May,2000 5.9 40.33
    Alliance 1995 Fund (Gr) 31 May,2000 5.4 59.48
    Alliance Cap. Tax 1996 31 May,2000 5.3 73.98
    Tata IT Sector Fund 30 Apr,2000 5.2 13.29

    (The above list is not comprehensive and is only a sample)

    So we have seen fundamentals (Gujarat Ambuja Cements, HDFC) being snubbed for a little momentum (HFCL, Global Tele). This momentum exposes the net assets of the fund to volatility making the investors very jittery. It also does not do the fund manager’s credibility any good to have momentum stocks in the portfolio. Investors need to look at the fund portfolio for such stocks while reviewing a fund manager’s performance, that is, if they themselves are more committed to fundamentals than momentum.



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