Five years ago the IPO market was booming. In 1994, every financial analyst was trumpeting the superior returns from IPOs. No matter than that almost all of those gains came from a market aberration and were not likely to recur after the abolition of Controller of Capital Issues. It helps to recall a little bit of market history. In 1992, the special situations value stocks was the place to be, in 1993 and 1994 IPOs were doing well, and from 1995-97, debt was thepreferred asset class. During the past four years, the decline in interest rates and significant gains from growth stocks has left value stocks and smaller-cap names in the dust. Even within the BSE 30 or BSE 100, S&P CNX 50, the largest, most growth-oriented stocks mainly the FMCG and pharma majors have dominated the rest.

During 1998, of the 30 stocks of BSE Sensex, only 8 companies posted a positive gain. And all the eight gainers were FMCG, pharma or infotech companies. With numbers like that, it certainly is tempting to pile into these stocks only - as most fund managers are doing today. So much so, that there are now five sector funds focussed on FMCG, pharma and infotech stocks. But it is not unusual for one asset class or investment style to dominate for few years.

In fact, while these sectors are the indisputable current leaders, large cyclical stocks, small stocks, and real estate have all enjoyed such periods of superior performance at one point or another. When an asset class achievesshort-term dominance, investors often believe that a long-term trend has been established and overweight the asset class. But drastic allocation moves can be dangerous.

An investor who managed to concentrate in the best-performing asset class would of course achieve superior performance. But that would be quite a feat -- there's no guarantee one year's winner will be in the first place the following year. But don't despair! It is not necessary to identify the best-performing asset class each year. A strategy of simple diversification can provide good returns with low volatility.

A broadly diversified portfolio across sectors, capitalisation and style is guaranteed never to be the best in any one year -- but it will also never be the worst. Such a portfolio will show fewer negative years than any concentrated portfolio.

Investors who seek long-term financial success should own a broadly diversified portfolio consisting of multiple asset classes. By diversifying, you'll avoid the extremes, and find ahappy medium.

Keep in mind that in any given year, your portfolio's returns may significantly differ from benchmarks such as the Sensex. However, over the long-term, you are more likely to meet your goals by adhering to a consistent strategy of diversification. It is tempting to concentrate in the face of short-term outperformance, and large-cap growth stocks certainly are attractive right now. But if we heed to the lessons of history, these stocks may be on the brink of a fall. A diversified portfolio makes as much sense as ever.

Following is my selection of the two evenly diversified funds and two highly concentrated funds. In the evenly diversified fund, the percentage allocation to an individual stock does not exceed 55 of the total portfolio. On the other extreme, the concentrated fund have over 20 per cent allocation to its top holding.

The diversified funds
Prudential ICICI Growth Plan, an open-end equity fund, has been an excellent performer throughout its brief history of one and ahalf years giving an annualised return of 104 per cent. And in calendar 1999, the fund is up 188 per cent and ranks #8 among 36 open-end equity funds for the one-year period ending December 31, 1999. The fund's performance looks more impressive as it has been achieved with an evenly diversified portfolio across sectors even though the number of stocks in the portfolio has been restricted to 30. The fund has also contained the maximum exposure to an individual stock at 5 per cent.

Today, the portfolio is a good combination of growth and cyclical stocks with around 45 per cent of the assets in software, FMCG and pharma stocks and the rest in cyclical stocks, as on November 30, 1999. The fund is a portfolio of stocks with quality management and sound financial strength that hold promise for long-term. Sundaram Growth Fund, a diversified equity fund, has given an annualised total return of 37 per cent since launch, against a 9.5 per cent return on BSE Sensex. The fund has consistently outperformed the Sensexsince its launch. It has given these returns through investing in a well-diversified portfolio without any concentration in a singe stock or sector. Following this strategy, the fund has successfully guarded its assets in a falling market.

The Rs 26 crore fund is spread over forty seven stocks. The only sector dominating the latest portfolio is infotech with nearly 24 per cent of the assets. Of the top ten holdings, four are infotech stocks accounting for around 18 per cent of the assets. The fund is also upbeat on PSU stocks. The fund, with its diversification, is unlikely to witness wild gyrations.

The concentrated funds
Canexpo, a defined portfolio equity fund, invests in predominantly export-oriented units and companies with good forex earnings. Canexpo has a defined portfolio focus but is not a sector fund. For the one year ending December, 1999, the fund is up 184 per cent. The fund has pared its exposure to Pharma at 14 per cent and FMCG at 8 per cent, as on December 31, 1999 and addedfurther to infotech and telecom sectors accounting for 59 per cent of the total portfolio.

Canexpo is a small fund spread over 33 stocks with the top 10 stocks accounting for 66 per cent of the net assets. The largest holding of the fund, Infosys Technologies accounts for 30.69 per cent of the fund. It is an aggressive equity fund and for its size and maneuverability can be an attractive medium-term investment. The fund is almost a proxy of Infosys Technology given its such a high allocation to a single stock. This at least serves one objective. Making Infosys affordable.

Tata IT fund, erstwhile Tata Core sector fund, launched as a seven year closed-end scheme was converted into an open-end scheme in August, 1999. Initially launched with the objective of investing in the core sectors of the economy, the AMC from December 28, 1999, changed the fund focus to an Infotech fund. Tata Core fund has given an annualised return of 30 per cent.

Though the fund initially invested in the falling markets, itwrongly foresaw an early economic recovery. After repeatedly recording negative performance figures the fund gradually abandoned its core sector orientation and since April, 1998 shifted its focus to software and pharma scrips. These sectors accounted for a mere 9 per cent and 11 per cent, respectively in March, 1998, but a whopping 51 per cent and 45 per cent as on September 30, 1999. As on December 31, pharma has been pared to 11 per cent and software augmented to 75 per cent of the net assets. The fund has justified the shift in focus by renaming the fund as Tata IT fund. Today the fund has a 27 per cent allocation to a relative illiquid infotech stock, Visualsoft.

The fund might get very lucky with its big bet , but it will also have to ride its wild movements. The fund is not suitable for risk averse investors who cannot stand high volatility.

-- Value Research