FUND OF THE FORTNIGHT: Canara Robeco Emerging Equities:

With every passing month, the asset under management (AUM) of Indian mutual funds is touching a lifetime high. In September 2014 the total average AUM of the mutual fund industry grew 7.3 per cent on sequential basis to an all time high of Rs 10.7 trillion. The equity mutual fund that constitutes little more than a quarter of the total mutual funds’ AUM grew by 5 per cent in the same period. Small and mid-cap dedicated funds remained the leaders in such a rise in AUM and were the best performing categories delivering the highest returns in all time frames ended September 30, 2014.

Canara Robeco Emerging Equities Fund, one of the small and mid-cap committed funds, remains one of the best performers in its category. After struggling to perform in the first three years after inception (it was launched in 2005), the fund has been able to deliver and beat its benchmark and category returns continuously in the following six years. One of the reasons for the under-performance of the fund in the first few years was the frequent change in fund managers. The fund is currently jointly managed by Ravi Gopalkrishnan and Krishna Sanghavi who have been at the helm since September 2012. The fund since then has been delivering better returns baring a few quarters of 2013 when the mid-cap as a whole under-performed the market.

Over the last one year the fund has done a lot of catching up and its performance has remained in the top quartile of its category. In fact, the past three years have seen the fund generating returns of 33.37 per cent as against 26.71 per cent by its category. The year-till-date performance is even more impressive as it outperformed its category by a huge 17.36 per cent. This return has been generated despite fund’s expense ratio of 2.95 per cent, which has been continuously increasing in since last few years. The risk-adjusted return measured by the Sharpe ratio of the fund stands at 1.1, one of the best in its category, which shows that the returns are not generated by taking extra risk. Even alpha of the fund, which measures the difference between a fund's actual returns and its expected performance at particular level of risk measured by beta, stands at 13.86 one of the highest in its category.

One of the reasons for such a notable performance is the fund manager’s ability to pick the right stocks. What also protects the fund from being dragged down is its well-diversified portfolio. Compared to its category which holds median stocks of around 44, the fund had 62 stocks at the end of September 2014. Not a single stock in the fund carries more than 2.8 per cent weightage in the entire portfolio. The top ten stocks constitute less than a quarter of the entire portfolio and the top three sectors in which it has invested include financial, construction and automobile. These sectors in altogether constitute 45.4 per cent of the total portfolio.

Looking at the well-diversified portfolio, the fund manager’s ability to pick the right stocks and the overall better performance of mid and small-cap companies, we recommend this fund to moderate and conservative investors.