Monday, October 03, 2011

October 2011


You should take one step at a time and begin investments with a balanced fund or a large cap equity diversified fund. Sectoral funds should not form core of your portfolio. A sector story which sounds convincing and in fashion at one point will go out of fashion at some other point. Moreover when a story is current, its negative points get ignored and wished away. Sector funds are all about choosing sectors carefully after thorough research, avoiding over-exposure and know-how of when to exit. They can be used as a top-up to your holding of diversified equity funds.

Infrastructure Funds

Infrastructure funds, which were promoted in great gusto when the equity markets were booming in 2006 and 2007, failed to deliver appealing returns when assessed over a 3-year time frame. In fact, they have given quite scornful returns to investors, a mere 9% in the past one year. Infrastructure, in general, has tremendous scope for growth, as our country needs huge developments in that area and the recent government policies are expected to give a fillip to this sector. The short-term outlook for this sector is neutral. The sector has corrected significantly, but concerns over rising inflation, unfavourable interest rate scenario and delay in other approvals from the government remain and meaningful land acquisition reforms remain. In the long term, the sector is expected to generate significant wealth as investment in it by the government and via the PPP model is inevitable.

Banking Funds
Reached the pinnacle?

Banking industry is one of the key drivers of a nation’s economy and its growth is dependent on the overall growth in the economy. Even though there are short term challenges like high government deficit level, high inflation, rising interest rates, rise in cost of money and high commodity prices, the banking sector is seeing healthy growth due to rise in rural income, increased spread of banking services and robust credit offtake inspite of signs of slowdown. The growth of banking sector is likely to be high over the next two to three years. Albeit, the category posted negative returns over the short-term periods, it outperformed the diversified equity category with huge margin for one, three and five year periods. It posted 8%, 25.49% and 27.12% of compounded returns while the equity diversified category registered -0.65%, 8% and 13% of returns respectively. Average AUM of the category stood at Rs. 2488 crore as on 31 March 2011. Average expense ratio as per latest data was at 2.36%. Overall loan growth grew 23% year-on-year according to the latest data by the Reserve Bank of India. However, part of the growth can be attributed to the low base last year. In the first nine months, the loan book grew by only 15%. There are also concerns relating to pressure on profit margins given the prospects of interest rates rising. This will raise the cost of borrowings for banks, thereby, hurting their margins. Banks may find it challenging to maintain the pace in growth.

Technology Funds
A risky proposition…

Information Technology industry has played a major role in the Indian economy since last decade. IT funds manage investors’ assets worth about Rs 500 crore. Over the longer term too they have performed well, and in the past 12 months the average tech fund has gained nearly 27%, while over two years their average gain is 60% per year, making them the second best among funds. In the Indian context, technology is one of the best sectors to invest because you get high corporate governance, high return parameters and good growth prospects. For Information Technology, currency fluctuation is the key risk though companies mostly hedge themselves against it. Demand seems to be robust as companies continue to make new clients and increase their order books. The index ‘BSE IT’ underperformed BSE Sensex for the one-year period. However, it outperformed Sensex for three and five year periods. The performance of the IT category was also more or less in line with the performance of diversified equity category. It registered 2%, 7% and 11% of CAGR returns for the one, three and five year periods while the equity diversified category posted -0.65%, 8%, 13% of returns. Average AUM of the category stood at Rs. 418.85 crore as on 31 March 2011. Average expense ratio as per latest data was at 2.47%.

Auto Funds
Applying brakes…

2010 has been huge success for the auto funds. In 2011, they will have two challenges. One is the base effect because they have done pretty well and the second is the interest rates because this is a very interest sensitive sector. If the interest rates keep on rising then probably there could be some pressure on the automobile sector. But overall they should do well as a consumption theme but significant out performance like what they did in 2010 would be a bit of a question mark.

FMCG Funds
On the fast track…

Indian FMCG industry is expected to grow at a base rate of at least 12% annually to become Rs 4,000 billion industry in 2020, according to a report released at the CII FMCG Forum 2010. The Report noted that the positive growth drivers mainly pertain to the robust GDP growth, opening up and increased income in the rural areas of the country, increased urbanization and evolving consumer lifestyle and buying behavior. According to AC Nielson, the FMCG industry in India has witnessed steady sales growth of a 12% CAGR over the past decade. The category outperformed equity diversified category for one, three and five year frames by delivering 20%, 22% and 18% of CAGR returns whereas the equity diversified schemes registered an average of -0.65%, 8% and 13% respectively. Average AUM of the category stood at Rs. 163.49 crore as on 31 March 2011. Average expense ratio as per latest data was at 2.49%. A long-term growth perspective is seen in the FMCG sector considering the significant under penetration in many FMCG categories (Food, Personal care), highly untapped rural market & emergence of newer categories. Over a three-year time frame, FMCG funds outperformed some good performing diversified equity funds by managing their risk well and delivered enticing risk-adjusted returns as depicted by their high Sharpe Ratio. Moreover, the portfolio churning too has not been high due to the evergreen prospects posed by most companies in the sector. But nonetheless the expense ratio has been relatively high compared to diversified equity funds. Moreover, when assessed over for a five-year period, some good diversified equity funds have delivered better returns. For the last 12 months, FMCG funds are the best performers with over 20% returns. In the two-year period, it is the second best category with Rs 100 invested becoming Rs 200.

Pharma Funds
The best bet…

Pharmaceuticals seem to be best bet in short as well as long term. An increased spend on healthcare by the government argurs well for the sector and domestic demand has been nothing but robust. The total size of Indian pharmaceutical industry, excluding exports and government purchases, stood at Rs 55,454 crore in the last fiscal 2011. According to ORG IMS Research the Indian pharmaceutical market is expected to grow at 11% to 12% per annum, which will make India one of the world's top pharmaceutical markets. Over the periods, the BSE Health Care index has been among the best performing indices, posting CAGR returns of 16% for the five-year period and outperforming the Sensex returns of 13.6%. The pharma category outperformed diversified equity category during bear and high volatile periods. It posted CAGR returns of 9.34%, 24% and 19.36% for one, three and five year periods respectively whereas the equity diversified category registered -0.65%, 8% and 13% of returns respectively. There are four schemes in the category, out of which Reliance Pharma and Franklin Pharma performed well compared to peers and other equity oriented schemes. The scheme under performed its benchmark BSE Healthcare for one-year period ended 21 June 2011, however it performed for three and five year periods by registering 34% and 30% of CAGR returns respectively. Average AUM of the category stood at Rs. 838.30 crore as on 31 March 2011. Average expense ratio as per latest data was at 2.38%.

PSU Funds
Treasure trove…

Government owned companies are storehouses of tremendous value and when this value is unlocked, investors will gain. Government companies can expect some favourable treatment in the policy space, like preference to them in government contracts, protection from competition etc. But there are several negatives in government ownership - recruitment policies, compensation policies, speed of decision making, indifferent client servicing and the image they consequently have, bureaucratic processes are all typically their Achilles heel. All said and done, during the economic slowdown, they showed greater resilience than their private sector counterparts. With a new set of government firms likely to go public this year, there will be a lot of portfolio churning in PSU funds to include more such stocks. The PSU index has outperformed the Sensex by 8-10% over the last 10 years. Since May 13, 2002, it has returned almost 445%, as against 438% from the Sensex. Presently, there are only four mutual fund schemes investing in PSUs, apart from two public sector bank funds. The former include Baroda Pioneer PSU Equity, Religare PSU Equity, SBI PSU and Sundaram PSU Opportunities.

…and ride the cycle

Sector funds move in cycles. Every cycle will have a new out-performer and an under performer. For example, the Information Technology sector was at peak while compared to other sectors during the year 2005-06. But it was seen at the bottom during 2007-08. Likewise, the year 2007-08 was the best performing period for the infrastructure industry. But the recent period shows that this sector is currently out of favour. Hence, sector funds are suited for aggressive investors as they are exposed to higher risk. Investors who understand the sector dynamics well can consider and invest in these funds. To benefit from out performance, one needs to be in right sectors at the right time!

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