Future Leaders Fail To Drive Up Returns

ABN Amro Future Leaders Fund is positioned as a scheme that invests in mid-cap and small-cap stocks, with a bias towards growth stocks. It is positioned in the high risk-high return category.

The investment objective of the scheme is to aim for long-term capital appreciation by investing in companies with high growth opportunities in the middle and small capitalization segment, defined as 'Future Leaders'. The offer document defines 'Future Leaders' as companies with a market capitalisation below that of the 99th stock in BSE 500 Index - it may or may not be a constituent of the BSE 500 index. 65-100 per cent of the investments will be in the 'Future Leaders'.

The scheme is benchmarked to CNX Midcap, and has underperformed its benchmark. The scheme was launched in April 2006, just before the market crashed in May-June 2006, which affected its performance. To compound the problem, the midcap segment took a longer time than the bluechips to recover. The scheme was not sitting on too much of cash and had already deployed around 82.4 per cent of its net assets into equities at the time of the crash, leaving little opportunity for bottom-fishing.

The markets have witnessed three corrections since the scheme's inception. The Future Leaders Fund was able to recover well from the corrections in May-June 2006 and February-March 2007, and closely tracked the returns generated by the CNX Midcap index. However, the correction in July-August 2007 has dealt a body blow to the scheme.

The recent correction has hurt more because of the scheme's IT-biased portfolio. Midcap technology scrips have become the mainstay of the portfolio. Northgate Technologies (8.77 per cent), Satyam (3.72 per cent), Tanla Solutions (3.08 per cent), MphasiS (2.19 per cent), Infosys Technologies (2.15 per cent), NIIT Technologies (1.81 per cent), Nucleus Software Exports (0.81 per cent) and KLG Systel (0.59 per cent) are the scheme's holdings in the IT sector. Pharma is another sector the scheme is bullish on and that has also not performed too well.

The churning rate for the scheme is quite high. Housing and construction enjoyed a high exposure during the early days. Thereafter, the exposure was trimmed significantly and the opportunity to reap the full benefits was lost.

Among the new themes, the scheme has been bullish on media and entertainment since the beginning of this year. The scheme has no exposure to some of the sectors which have been the major contributors of the current rally like banks, metals and oil & gas.

This seems to be one of the reasons why it has lost out on the current stage of the bull run. That also explains to a large extent why the scheme has underperformed the category of diversified equity schemes in year to date by over 20 per cent. The year to date, average returns of diversified equity schemes as on October 26, 2007 was 38.15 per cent. In comparison the scheme has delivered 18.21 per cent.

The fund manager of the scheme has recently changed. A new fund manager has taken over. It remains to be seen that how soon is he able to get the fund into the performance mode.

The only stocks which have featured in the portfolio consistently since its inception are DS Kulkarni Developers, DCM Shriram, Deepak Fertilisers, Phoenix Lamps and TV18. Currently it has exposure to 36 scrips spread across 15 sectors. ABN Amro Future Leaders manages a corpus of Rs 117.49 crore, which has seen a decline over the quarters.