Living Dangerously - Magnum IT

If you look at the 1-year return of Magnum IT, it is nothing short of impressive. At around 147.74 per cent (March 31, 2010), it ranks amongst the top 10 in the entire category of equity funds

That was the good news.

The bad news is that its track record, as far as performance goes, is pretty spotty. Moreover, it has witnessed a fair amount of turnover where fund managers are concerned.

Launched mid-1999, the fund got off to a really pathetic start. From 2000 to 2002, it managed to be consistent by maintaining its second worst performer spot all through those three years. Not that it was particularly impressive in 2003 and 2004 either. However, Magnum IT enjoyed a banner year in 2005. The reason? Sandip Sabharwal took over the fund that year and the result was that it catapulted to the No. 1 slot and changed its fortunes for the better. But that victory was short-lived. It began to gradually slip from that coveted position to underperform the category average in 2007. In 2008, it held the title as the worst performer in its category.

Jayesh Shroff took over the fund in October 2008. Due to high mid- and small-cap allocations and low cash calls, it was the worst performer that quarter (December 2008) amongst its peers.

Shroff attempted to rectify that situation by raising the cash exposure. From 14 per cent in November 2008, it went up to 32.59 per cent by January 2009. Simultaneously, the large cap exposure also began to get upped. "The situation was extreme. There were signs of the macro-economic environment turning bleak, especially in the West where the client profile of infotech companies lie. So we felt it wiser to take a cash call at that time because the revenue stream would be directly affected," he says. Unfortunately, that did not help. The fund suffered (relatively harder than its peers) even in the quarter of March 2009.

But Shroff got really lucky with timing. In February itself he began to lower cash holdings and once the market began to pick up in March 2009, he moved rapidly. He plunged into the market and since then has not looked back. The cash allocation dipped by 18 per cent in just a month. He believes that that move contributed significantly to his fund galloping ahead in 2009. "We deployed cash at the right time," he admits. "The moment the market began to pick up in March, we lowered our cash holdings substantially."

The fund's mid cap bets also played out well with stocks like KPIT Cummins Infosystems and Infotech Enterprises, which were there in the portfolio for a while, proving to be extremely lucrative.

"The stocks we owned, especially in the mid cap space, worked out well. We also did some churning between large caps which delivered," adds Shroff. Weightage to Infosys and TCS rose during 2009 while he played the Wipro card for just a few months.
Coming down to the essential issue, is this fund for you? Yes, but only if you want to live dangerously. To begin with, there is a generic viewpoint that we hold. Taking an exposure to a sector fund is by itself risky, whatever be the sector in question. If you choose to own such funds, total exposure must be limited to a maximum 20 per cent of your equity portfolio. To add to it is the portfolio risk. Magnum IT has been known to take extremely high single stock exposures of 35 per cent (Infosys), 22 per cent (TCS) and 20 per cent (Wipro). But Shroff feels that this comes with the territory. "In any given sector, there are not innumerable opportunities available, so concentration is a natural outcome of the investment mandate," he says.

Nevertheless, we feel that this one is way too concentrated. The January 2010 portfolio comprised of just around 9 stocks, with the top three (Infosys, TCS, Infotech Enterprises) cornering 65 per cent of the portfolio, and that too one of them was a mid cap. In February it was eight stocks, with the top six at 67 per cent.

Most years won't be nearly as good as 2009, but can one expect Magnum IT to remain a notch above the competition over time? Frankly, there's no telling. This fund has alternated between being the best performer in its category and the worst. Going by the current fund manager's style, it could deliver admirably but collapse dismally when the fortunes of the sector change or one of the big bets fail to deliver.