Monday, October 06, 2008


Sector Funds

Marketing via Returns machine

The media and the recent return charts have struck a chord with investors who are keen on adding a sector fund to their portfolio. The marketing gimmicks kindle investor fancy. In reality, sectoral funds have seldom given returns higher than the Indian stock market. These funds are not known to outperform the blue-chips belonging to the sector they focus on. The indices designed by stock exchanges to track sectors such as the Bombay Stock Exchange’s BSE Pharma or BSE Auto too comfortably beat returns from sectoral funds that invest in the stocks belonging to the same industries. There are very few funds that have managed to buck the trend. The information and technology sector funds are the only ones that have beaten both the Sensex and the BSE IT Index over the last five years. The infrastructure and banking boom have been a recent and short-lived phenomenon.

Banking Funds - Bubble or Buoy?

While the financial crisis has felled several international banking giants, closer home, it is the banking sector funds that have outperformed all other categories of funds over the last three months. Seven of the 10 top performing mutual fund schemes during the July-September quarter were banking schemes. Three funds focused on the financial and banking sector have filed their offer documents with SEBI - HSBC Banking and Financial Services Fund, SBI Magnum Sector Funds Umbrella (MSFU) - Banking and Financial Services Fund and ABN AMRO Banking and Financial Services Fund. Sundaram BNP Paribas Financial Services Opportunities, Reliance Banking ETF, ICICI Prudential Banking and Financial Services Fund, Lotus India Banking and Sahara Banking and Financial Services were launched in 2008. This sudden enthusiasm for the financial sector seems paradoxical considering the fact that questions are being raised at the financial institutions both domestically and globally on how they are managed and why they have hidden the risk associated with some of their products. So, why are we seeing so much interest in financial and banking sectors and that too now of all times? One reason could be that in the past one year, net assets of the existing banking funds have grown at the rate of 24 per cent overshadowing that of other sectors. This shows that the banking funds have been able to hold the attention of the investors. The fund companies are launching financial funds responding to investors' fondness to this sector. The launch of too many specific sector funds could be a time to keep away from them. Remember how technology funds betrayed our trust in 2001. High time we learnt our lesson.

Technology Funds - Cash Fails to Rescue…

Year 2008 may end on a jarring note for technology sector fund investors. With a slew of negative news for the sector, technology funds hit a fresh low with ICICI Prudential Technology Fund and IL&FS eCOM Fund plunging by more than 50 per cent from their IPO price of Rs 10. The fall in technology counters has been so rapid that even a large cash position in most funds has failed to stem the slide in net asset values. The average cash holding was an uncharacteristically high 16 per cent with some funds holding more than 20 per cent of their assets in money market instruments. There are currently two schools of thought on the impact of the US slowdown on Indian IT companies. Nearly 50 per cent of the Indian IT industry's turnover during the first half of the current fiscal had come from the US market. A section of the market believes that the slowdown will adversely impact the Indian IT sector while another segment opines that a cut in IT spending will benefit the Indian industry as US corporations seek to reduce costs by outsourcing more IT related activities. Currently though, it is the first line of thought that continues to dictate the market movement. The top rung technology companies may not earn revenues in excess of 70-80 per cent but they are sure to maintain growth at a healthy pace in future and outperform other sectors of the economy.

Pharma Funds - Health Blues

The pharma sector has proved to be a laggard in the past one year. There are currently five pharma funds in the industry, managing overall assets of Rs 351 crore. All of them together delivered an average return of 9 per cent, underperforming the index.

Auto Funds - Overheated Engines

As concerns about the auto sector seem to be mounting, the funds dedicated to this sector are feeling the heat. Auto sector funds are at the bottom of the equity category - they rank even below the debt funds. The reasons for the poor performance of the sector are not difficult to find. Interest rates touched a five-year peak and this hit the auto sector which is very interest rate sensitive. This resulted in a slow-down of the demand for cars and sport utility vehicles in the country, where majority of the vehicles are bought on credit. The RBI diktat to banks on January 31 2008 to curb lending and investment to check inflation also proved to be a major deterrent for the first timer buyers. Total sales of cars, trucks and two-wheelers declined in the first quarter of the current financial year. The slowdown has been more visible for two-wheeler companies like Hero Honda, Bajaj Auto and TVS. Consequently there had been a sharp decline in the share price of the top auto companies this year.

Infrastructure funds - a safe haven?

One way of staying away from the volatility of the market, and still betting on the growth story of India, will be investing in infrastructure funds. Infrastructure funds have ruled the roost in the rally with almost all the funds doling out handsome returns over the year. These funds invest in companies that are a part of perennial sectors like construction, energy, telecommunications, power etc..., which hold the key to development of any economy around the world. These sectors enjoy maximum government support for development due to high gestation periods, huge investment outlay and primarily because the country`s growth relies on these sectors. At present, there is a wide gap between the potential demand for infrastructure and the available supply. This is a challenge before the economy, and the government through private-public partnerships and FII participation, is trying to fill in the gap. The increased government impetus on infrastructure development and the superlative performances of the corporates provide a window of opportunity to Infrastructure funds. But the 2008 market meltdown has crushed this citadel as well.

Precarious nest egg

Besides the tendency of sectoral funds to underperform as discussed at the outset, investment in them makes little sense for two other reasons. One, their narrow investment objective raises the risk they carry. They, thus, defy the basic principle of mutual fund investment — of diversifing risk by not keeping all eggs in one basket. And two, investors must make no mistake in deciding when to enter and exit these funds, which, again, is in direct contrast to the convenience that mutual funds are supposed to offer. Lack of diversification and dependence on timing makes sector funds a risky proposition. With the days of heady returns way behind us, advocating investment in sectoral funds, even to those brave of heart, would only kill and not make a killing!

No comments: