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What's the real story?

Is Zee Telefilms a consumer stock or a media stock? I am unable to figure out conclusively as I find the presence of 100,000 shares of Zee Telefilms worth Rs 11 crore as the top holding of the Rs 32 crore Kothari Pioneer FMCG Fund.

And to add to the confusion, the offer document of the first Internet fund from Kothari Pioneer also classifies Zee Telefilms as a convergence play.

The justification in its draft offer letter is "Zee Telefilms, the company that operates the popular Indian satellite channel is positioning itself for convergence of the Internet with other forms of media. Zee's subsidiary, SitiCable has a cable network covering several cities. Many of the users of this network will soon have high-speed access to the Internet. Zee has a rich library of content produced for TV, which can be converted to be accessed through the Internet. Zee's strategy of farming out production makes it less capital intensive and lowers the risk profile of the company."

Not only this, even the definition of the financial conglomerate the ICICI group has been tortured to justify as an Internet play. The rationale: The group has made major forays to facilitate electronic financial transactions. ICICI Bank was one of the first Indian banks to allow customers to query and carry out a limited range of financial transactions through the Internet. The ICICI group, either directly or through joint ventures, is likely to facilitate e-commerce in financial services covering areas like banking, depository services and stock trading. This initiative is likely to create a long-term competitive advantage for the group, as easier and less expensive product delivery, streamlined back-office, and a higher level customer service makes the whole experience of financial transaction easier and more convenient for its clients.

The currently open - Prudential ICICI Technology Fund proposes to invest in technology intensive sectors. And its definition includes software service and products, hardware, e-commerce, Internet, telecommunications, media, life sciences (including pharma, health management services and agrochemicals) and research & development companies and laboratories. Though the fund has highlighted the sectors of information technology, telecom, media and life sciences as the investment universe, these may not be the only technology intensive industries, or for that matter companies, carrying on research and development. With a not-so-specific definition, there is enough room for other sectors to find a place in the portfolio.

Unit Trust of India has five growth sector funds - Brand Value, Pharma & Healthcare, Software, Services Sector and Petro Fund. Of these Pharma, Software and Petro are clearly defined and the nomenclature is self-explanatory. But the Brand Value and Services Sector funds can include almost any company.

Hard to say, isn't it? That's the trouble with sector classifications in mutual funds these days. As technology has seeped into so many facets of business, it is becoming difficult for me to keep up with the stretched definitions. And this is not an Indian peculiarity. Even in the US, confusion prevails whether amazon.com is a retail stock or a technology stock.

There is as much art as science when classifying these stocks. With rapidly evolving technologies and the absence of even a basic standard industry classification, the fund manager can truly emerge as an artist - and wrap his market timing in a sector fund with great artistry with stretched classifications. Of course, this isn't the first time funds have had difficulty classifying their holdings. Few years ago, every fund claimed to be a value fund. And as the conventional value stock tested the patience of almost every fund manager, they chose to stretch the definition of value to include any growth stock in their portfolios.

Besides these examples, there are some genuine problems in classifying few companies. Like the diversified mega-conglomerates - Century Textiles, Grasim Industries and Larsen & Toubro have puzzled all of us with their sizeable businesses in some of their product lines.

With growing investor appetite and awareness for specialised technology funds, mutual funds will do well to describe their holdings in greater detail. For instance Internet Service Provider, Internet Retail Stocks, Internet Content and similarly break down their telecom holdings into Cellular, Service and Equipment.

Moral
Don't trust anyone's industry classifications. Look at the fund's holdings for yourself. And to make sure you can stomach the volatility, review its standard deviation too. That way you won't get caught with a fund that owns a tiger while you wanted a cow.

The Ambiguous World of Speciality Funds

Mutual Funds

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