Reliance Tax Saver has been on a roll over the last 9 months - topping the ELSS performance charts for the last 3 quarters in a row - which is in stark contrast to a disappointing 2013. Why did performance dip in 2013 and what's been done to engineer this turnaround? Ashwani has a simple answer - he stuck with his convictions through a rough 2013, and his bets have played out this year, quite handsomely. Read on to understand what he is doing to maintain this momentum, after many of his picks have already appreciated handsomely. Read on to also understand why he believes some parts of the portfolio of Reliance Tax Saver are now a little difficult to replicate, giving him that extra edge in a competitive market.

What do percentiles and their colours signify?

Fund performance is typically measured against benchmark (alpha) and against competition. Performance versus competition is measured through percentile scores - ie, what percentage of funds in the same category did this fund beat in the particular period?

If a fund's rank in a year was 6/25 it means that it stood 6th among a total of 25 funds in that category, in that period. This means 5 funds did better than this fund. In percentile terms, it stood at the 80th percentile - which means 20% of funds did better than this fund, in that particular period. If, in the next year, its rank was 11/26, it means 10 other funds out of a universe of 26 did better than this fund - or 38% of funds did better than this one. Its percentile score is therefore 62% - which signifies it beat 62% of competition.

Most fund managers aim to be in the top quartile (75 percentile or higher) while second quartile is also an acceptable outcome (beating 50 to 75% of competition). What is generally not acceptable is to be in the 3rd or 4th quartiles (beating less than 50% of competition). Accordingly, we have given colour codes aligned with how fund houses see their own percentile scores. Green colour signifies top quartile (percentile score of 75 and above), yellow or amber signifies second quartile (percentile scores of 50 to 74) and red signifies 3rd and 4th quartile performance. A simple visual inspection of colour codes can thus give you an idea of how often this fund has been in the top half of the table and how often it slips to the bottom half. A great fund performance is one which has only greens and yellows and no reds - admittedly a tall ask!

WF : Your Reliance Tax Saver Fund has been at the top of the league tables since the last 9 months. What's been driving this performance and how do you plan to sustain a top quartile position, going forward?

Ashwani: We have remained invested in high quality MNCs and domestic cyclicals. These have rebounded very meaningfully. There are stocks in our portfolio that have appreciated meaningfully this calendar year. These are not new positions we have created - we stayed invested in high conviction stocks which did not do well last year, but which have vastly outperformed this year.

WF: Are there any changes that you are now making in your fund to sustain this performance? Are you reviewing some of the outperformers to see whether they should continue in your fund at current valuations?

Ashwani: We are constantly reviewing the portfolio. There are some midcap companies where we have made very good gains - in some cases, we are now shifting to larger companies within the same sector, where we think performance from here on may be better than the smaller counterparts, especially considering the volatility

Secondly, where we believe that from these levels the profit potential may be limited, we are looking at alternatives, some even in the defensives space which we think have value and which give good diversification opportunities as well. Some of these include sectors like IT, some healthcare and even some metals and mining companies. So, the idea is to look for every opportunity that can help us sustain this performance.

What do percentiles and their colours signify?

Fund performance is typically measured against benchmark (alpha) and against competition. Performance versus competition is measured through percentile scores - ie, what percentage of funds in the same category did this fund beat in the particular period?

If a fund's rank in a year was 6/25 it means that it stood 6th among a total of 25 funds in that category, in that period. This means 5 funds did better than this fund. In percentile terms, it stood at the 80th percentile - which means 20% of funds did better than this fund, in that particular period. If, in the next year, its rank was 11/26, it means 10 other funds out of a universe of 26 did better than this fund - or 38% of funds did better than this one. Its percentile score is therefore 62% - which signifies it beat 62% of competition.

Most fund managers aim to be in the top quartile (75 percentile or higher) while second quartile is also an acceptable outcome (beating 50 to 75% of competition). What is generally not acceptable is to be in the 3rd or 4th quartiles (beating less than 50% of competition). Accordingly, we have given colour codes aligned with how fund houses see their own percentile scores. Green colour signifies top quartile (percentile score of 75 and above), yellow or amber signifies second quartile (percentile scores of 50 to 74) and red signifies 3rd and 4th quartile performance. A simple visual inspection of colour codes can thus give you an idea of how often this fund has been in the top half of the table and how often it slips to the bottom half. A great fund performance is one which has only greens and yellows and no reds - admittedly a tall ask!

WF : A look at the longer term track record suggests a somewhat choppy performance in recent years. You had a great 2012 and are at the top this year, but 2013 was quite a disappointment. What went wrong in 2013 and what changes did you make in portfolio strategy to turn around performance this year?

Ashwani: I think we bet too early on inflation cooling and growth coming back into the economy. Unfortunately however, Government action which showed some promise with a change of guard in the Finance Ministry, did not really follow through. This did not really give the required momentum to the economy. Since the portfolio was betting on revival of growth, we were underweight defensives like pharma and FMCG, which did very well in the first seven months of 2013, and cyclicals underperformed as growth lagged.

We also had exposures to good midcap companies which were structurally very sound, but which took a beating in Aug- Oct 2013, when stock, bond and currency markets saw significant volatility. These were companies with sound managements, but in a market correction, they fell significantly on thin volumes.

We remained invested in these companies as we remained convinced about their growth prospects. This conviction has helped us this year, when quality companies rebounded sharply from their dips of 2013. We opted not to switch into defensives as a knee-jerk reaction, and I would say staying the course helped us. Some parts of our portfolio are in fact a little difficult to easily replicate now.

WF : Why do you believe parts of your portfolio are now difficult to replicate? How important is this portion in terms of future wealth creation potential?

Ashwani: This fund has an exposure of around 30 odd percent at market value to multinational companies. In many of these companies, we built meaningful positions taking advantage of promoter dilutions that were necessitated by regulatory directives to increase outside shareholding to at least 25%. These are great businesses and in some of them, we now are meaningfully large minority shareholders with a 3% to 8% shareholding. Companies like Honeywell, Alstom, Schneider, Linde etc - these are not only great businesses to own, but from a technical perspective, also difficult to accumulate now from the market. The other factor that gives minority shareholders a lot more comfort is recent regulatory changes on transfer pricing and other matters that are aimed at protecting minority shareholder interests.

These are businesses that have survived a tough economic downcycle and are very well poised to ride the coming economic upcycle. For our distributor friends, its like saying those distributors who survived through the last market downcycle are the ones who will benefit most from the coming market upcycle. Now, during that downcycle, if they had to dilute some equity due to regulations, their minority shareholders can look forward to attractive gains in the years ahead.

MNCs are one key component of the portfolio. Our focus in this fund is to create alpha through a judicious combination of strategies in our portfolio.

WF : How has the recent Union Budget impacted your views on sectors and themes? What are some of the changes at the margin that you are now looking at, after the event?

Ashwani: The Budget laid a lot of emphasis on manufacturing and stressed its job creation potential. Our portfolios were anyway slanted towards manufacturing. Other areas that are key focus aspects for the Government include financial sector and energy - which again are well represented in our portfolio. We will be adding some more allocations to financials. We will also look towards reducing some deep cyclicals and considering more consumer focused businesses.

WF : Which themes do you see leading this bull market?

Ashwani: I think India oriented companies, good quality domestic companies both cyclical and consumer, should do well in this market. I am referring to consumer in a broad sense - both durables and non durables. Non durables certainly appear expensive but over a period of time can create value - we need to track this space closely. Consumption will be a big beneficiary of economic growth. Financials also appear well poised to do well in this market.

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