FUND FULCRUM (contd.)

October 2012

 

Notwithstanding volatility in the stock market, over 60% of retail investors have stuck to their investments in equity mutual fund schemes for more than two years, according to the data released by the Association of Mutual Funds in India. According to the rating agency, CRISIL, their analysis showed that out of Rs 1.4 lakh crore of retail investment in equity-oriented mutual funds, Rs 85,000 crore investment continued for over two years. However, high net-worth individuals, who invested over Rs 5 lakh, redeemed over 60% of their portfolio in less than two years. Mutual funds lost over 16 lakh folios over the past six months ended September, 2012 to end with 4.48 crore folios. Most of this decline is in retail category, especially in the equity segment, as these were impacted by volatile market sentiments. According to the data, retail folios fell by 3.67% to 4.355 crore by the end of September 2012 from 4.52 crore reported in March 2012. Retail investors increased their presence in debt-oriented mutual funds with a rise in retail folios by 10.5% in the past six months. Corporates continued to dominate mutual fund Assets Under Management (AUM) with 46% share, which is followed by HNIs with 25%, and retail investors with 23% share.

Piquant Parade

The Board of Yes Bank has approved its entry into the mutual fund business. The private sector bank is planning to enter the mutual fund business in the next 12 months. After having received the Board approval, the bank will now apply for regulatory licence from the Securities Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). In September 2012, Yes Bank had received a retail equities broking licence from the RBI, for which it expects to launch operations during the financial year 2013-14.

Regulatory Rigmarole

Mutual funds will use part of their Assets Under Management (AUMs) to finance the operating costs of a SEBI-proposed Self Regulatory Organisation (SRO) to regulate their agents and distributors. As per the suggestions made by its Mutual Fund Advisory Committee (MFAC), SEBI has agreed to set up an SRO to regulate the mutual fund distribution business. While the seed capital for setting up of the proposed SRO would be provided by SEBI and the mutual fund industry body AMFI (Association of Mutual Funds in India), some entities have also shown interest in sponsoring such an SRO. SEBI would follow a transparent process for selection of the sponsor for the SRO. Besides, SEBI is of the view that the recurring cost for the operations of SRO may be borne out of contributions from Asset Management Companies AMCs in the form of 0.02-0.03% of the AUM. The proposed SRO could be a registered company under the Section 25 of the Companies Act, wherein all profits are ploughed back into its operations, and will regulate distributors of securities like mutual fund, portfolio management and related products.

SEBI has mandated Mutual Funds/Asset Management Companies (AMCs) to ensure that total exposure of debt schemes of mutual funds in a particular sector (excluding investments in Bank Certificate of Deposits (CDs), Collateralised Borrowing and Lending Obligation (CBLO), Government Securities, Treasury Bills and AAA rated securities issued by Public Financial Institutions (PFIs) and Public Sector Banks) should not exceed 30% of the net assets of the scheme. It is also required that existing schemes shall comply with the aforementioned requirement within a period of one year from the date of issue of the circular, during which period, total exposure of existing debt schemes of mutual funds in a particular sector should not increase from the levels existing (if above 30%). The new SEBI guidelines on sectoral investment caps for funds could impact funding costs for Housing Finance Corporations (HFCs) and Non Banking Financial Companies (NBFCs) adversely. Long Term FMPs have been a route for the NBFC sector to raise medium to long-term funds at attractive rates from the bond markets. Consequent to current guidelines on sectoral cap, the portfolio construction and consequently funding to the NBFCs would witness a moderate change.

The Ministry of Finance may lift the restrictions on central public sector undertakings to invest in mutual funds floated by privately-held asset management companies. A committee appointed by the finance ministry, which is looking into investment of surplus cash by state-owned companies, may reverse an earlier order by the Department of Public Enterprise (DPE), which said such funds should be invested only in funds managed by public sector companies. The DPE, in a circular in 2007, had given permission to Navratnas and Miniratna CPSEs to invest in SEBI-regulated public sector mutual funds. The department, which functions under the Ministry of Heavy Industries, in subsequent orders clarified that large PSUs may only invest in SEBI-registered mutual funds, in which government or public sector banks hold more than 50% equity stake. AMFI has been negotiating with the finance ministry and DPE on behalf of privately-held fund houses, which are eager to manage the PSU surpluses. AMFI has written to both the ministry and DPE to open up PSU investment surpluses to privately-held fund houses as well.

SEBI has issued a general order with rejection criteria for draft offer documents for the protection of interest of investors. According to SEBI, companies that have circular transactions to build up capital (issue of warrants with a buyback clause upon conversion to equity), unidentifiable ultimate promoters and non-compliance with regulations on promoter contribution would be rejected. In case of rejection of draft offer document, the communication in writing shall contain the reasons. Among the reasons to reject an offer document include vague issues which do not disclose the purpose of use of proceeds, create no tangible asset, entail set up of fixed assets pending requisite approvals and where the time lag between fund-raising and deployment is unreasonably long. Those issues would also get rejected where business model of an issuer is exaggerated, complex or misleading and the investors may not be able to assess the risks associated with such business models. Those offer documents would also get refused where scrutiny of Financial Statements shows; (i) Sudden spurt in the business just before filing the draft offer document and reply to clarifications sought is not satisfactory. This will include spurt in line items such as Income, Debtors/Creditors, intangible assets, etc. (ii) Qualified audit reports or the reports where auditors have raised doubts / concerns over the accounting policies. This would also be applicable for the subsidiaries, joint ventures and associate companies of the issuer, which significantly contributes to the business of the issuer. This would also be applicable for the entities where the issue proceeds are proposed to be utilized. (iv) Change in accounting policy with a view to showing enhanced prospects for the issuer in contradiction with accounting norms. (iii) Majority of the business is with related parties or where circular transactions with connected / group entities exist with a view to show enhanced prospects of the issuer.  SEBI will put a list of rejected documents on its Website, along with details of the issuers, merchant bankers, and reasons for rejection. The order comes into effect immediately. 

AMCs get time till October 31, 2012 to inform all their investors who will get affected due to SEBI regulation on implementing single plan structure. SEBI has acceded to AMFI’s request to allow fund houses to implement discontinuance of existing SIPs, STPs, and dividend reinvestments under schemes, which run separate plans for retail and institutional clients from November 1, 2012 instead of October 1, 2012.

A large number of employees and relationship managers of banks advising mutual funds to clients will now get a unique identity number. SEBI has allowed AMFI to assign a unique identity number to employees of distributors advising investors till October 31 2012, instead of its original deadline of October 1, 2012. It has also allowed AMFI to implement the new change in transaction charges from November 1, 2012.

A unified regulator will cover mutual funds, insurance, pension, and the commodities markets. The Financial Sector Legislative Reforms Commission (FSLRC), chaired by S N Srikishna in its approach paper has proposed setting up a Unified Financial Agency (UFA).  Banking will not be under the purview of this unified proposed regulator. The financial sector is regulated by eight sector specific regulators like RBI, SEBI, FMC, IRDA, PFRDA, SAT, DICGC, and FSDC. The proposed regulator will cover mutual funds, insurance, pension, and commodities. The committee has recommended setting up the following structures:

• An independent debt management office
• A unified financial regulatory agency, which enforces the consumer protection law and micro-prudential law in all finance other than banking and payments
• The Financial Stability and Development Council (FSDC)
• The Financial Redressal Agency (FRA), which addresses consumer complaints across the entire financial system
• The Financial Sector Appellate Tribunal (FSAT), which hears appeals against all financial regulatory agencies
• A resolution agency which implements the proposed law on resolution of financial reforms
• The Financial Stability and Development Council (FSDC) 

FSLRC was formed to review the legal and institutional structures of the financial sector to make them in tune with the contemporary requirements of the sector.

SEBI recently decided to frame guidelines for investment advisors, after consulting other regulators like RBI, IRDA and PFRDA. To provide advice to investors in financial products, investment advisors need to have a good credit history. The move is aimed to protect the interest of investors in stocks and other capital market segments. The SEBI board recommended a number of measures in its draft regulations, including the requirement of a credit report or score from CIBIL (Credit Information Bureau (India) Ltd), and details of the research facility to be submitted by the entities seeking to become investment advisors. The draft regulations required the entities seeking to get registered as investment advisors to submit details of their data processing capacity. Instead, they would now be required to submit details of their in-house and other research capabilities. The investment advisors in their applications would be required to submit a credit report / score from the CIBIL. In the original draft regulations, the advisors were required to submit references from senior two bank officers. The draft regulations were presented in August 2012; the final regulations would be notified soon after adding the proposed changes. The new regulations would now come into force three months after the regulator’s notification. These regulations make it mandatory for investment advisors to get registered with SEBI subject to certain exceptions. 

Reliance Capital Asset Management (RCAM) expects the mutual fund industry in India to grow to Rs 20 lakh crore by 2020 on the back of regulatory changes and shift in investors' savings pattern. RCAM has about 12% market share in the mutual fund industry, which is pegged at Rs 7.53 lakh crore at present, making it the second largest fund house in the country. At present, bank deposits account for 56% of the total financial household savings and RCAM expects about 5-10% of bank investors to shift to mutual funds during the period. The shift from physical assets (like gold) to financial assets (like gold ETF and funds) would contribute about Rs 60,000-Rs 90,000 crore to the mutual fund industry. Due to the change in regulatory environment to manage pension and insurance assets, the mutual fund industry expects an increase of 2-7% in the overall growth of the sector. This could add additional Rs 5 lakh crore to Rs 7 lakh crore in the next 5-7 years for the industry. 

FUND FULCRUM

October 2012

The average assets managed by the Indian mutual fund industry inched very close to the Rs 7.5 lakh crore mark after a long haul. At Rs 7.47 lakh crore, the mutual fund industry's average assets under management (AAUM) registered about 8% rise since the April – June 2012 quarter and was highest only after May 2010 when the industry had reported an asset base of over Rs 8 lakh crore. In terms of asset size, HDFC Asset Management leads the pack with the highest AAUM base of Rs 97.77 lakh crore, registering a growth of over 5% since the April-June 2012 quarter. Reliance Asset Management, which was once reckoned as the largest fund house of the country in terms of assets, clocked in an average AUM of Rs 86.32 lakh crore followed by ICICI Mutual Fund with an asset base of Rs 76.38 lakh crore.

UTI, Birla Sunlife, Kotak, Reliance, and HDFC added more assets during the July-Sept quarter, according to the latest AMFI data. UTI Mutual Fund recorded the highest average assets under management growth (AAUM) of Rs 9860 crore during the July-Sept quarter. Its AUM now stands at Rs 70783 crore, up 16 % from Rs 60923 crore during April-June 2012. Birla Sunlife saw the second largest AAUM growth (Rs 5699 crore) from Rs 67206 crore to Rs 72904 crore, up 8% during the same period. In percentage terms, Kotak AMC recorded the highest increase of 20%. Reliance and HDFC also added Rs 5632 crore and Rs 5149 respectively. All in all, 34 AMCs saw a positive AAUM growth, adding Rs 57742 crore in all to their kitty. Axis Mutual Fund crossed the Rs 10,000 crore AUM mark once again. Its AUM went up from Rs 8759 crore during April-June to Rs 10490 crore, up 20% during July-September 2012. The industry’s assets went up from Rs 6.92 lakh crore during April-June to Rs 7.47 lakh crore during July-September, thanks largely to inflows in fixed income funds. The BSE Sensex has gained 1527 points or 9% from July till September end. The industry has seen robust inflows in debt schemes in July and August while equity funds have not been able to garner good inflows which resulted in a net outflow of Rs 2900 crore. In August, the industry saw a net inflow of Rs 7,548 crore and Rs 14,775 crore in income and liquid/money market funds respectively. Similarly, in July the net inflows were positive at Rs 21,670 for income schemes and Rs 17,708 crore for income/money market schemes. 

Owing to bad market conditions, folio consolidation and redemptions, the mutual fund industry has been seeing a relentless depletion in equity folios. Since March 2010, equity schemes have lost a whopping 49.82 lakh folios till August 2012 while debt funds have added 19.22 lakh folios. As per the latest SEBI data, there has been a drop of more than 15 lakh equity folios (including ELSS) — from 3.76 crore folios in March 2012 to 3.61 crore folios in August 2012. On the other hand, debt folios have increased from 52.50 lakh to 56.60 lakh during the same period, an addition to 4.10 lakh folios.

Piquant Parade

Despite the challenges surrounding the mutual fund industry, foreign asset managers are keen to get a foothold in India. In the last three years, seven overseas AMCs have bought a stake in Indian AMCs with the latest one being Invesco’s entry in Religare. US-based Invesco Ltd, a leading global player in  the mutual fund industry has picked up 49% stake in Religare asset management company for about Rs 460 crore, valuing the company that has assets under management (AUM) of Rs 14,600 crore at about Rs 950 crore. The deal value is based on 6.4% of the closing AUM at the time of receiving regulatory approval. Religare plans to launch overseas feeder funds and explore opportunities to attract QFI investments with the help of its foreign partner. The stake sale will result in change in the name of the company to Religare Invesco Asset Magement Company Ltd.  The joint venture will be headed by Saurabh Nanavati, CEO, Religare AMC along with the existing team. Religare AMC entered the industry by buying Lotus Asset Management in 2008. It achieved break even in the third year of its operations by posting Rs 31.60 lakh net profit in FY 2012. 

Japan’s Daiwa Securities Group-owned asset management company Daiwa Asset Management (India) Pvt. Ltd. plans to sell its Rs 789 crore mutual fund assets. The Japanese company’s move comes on the back of the Fidelity Group’s exit from the Indian mutual fund industry, largely on account of its inability to expand the business in a highly competitive market plagued by regulatory uncertainties. The fund house is in talks with at least four asset management companies, including State Bank of India-sponsored SBI Funds Management Pvt. Ltd and Chennai-based Sundaram Asset Management Co. Ltd, to sell its Indian fund assets. Daiwa Industry Leaders is the company’s only equity-oriented scheme with assets worth Rs 30 crore. Daiwa Mutual Fund has been conservative and has not launched too many schemes. It started its business in the country in January 2011 after buying Shinsei Asset Management (India) Pvt. Ltd in March 2010.

UTI Mutual Fund and Syndicate Bank have entered into a tie-up for distribution of UTI Mutual Fund schemes. Under the agreement, Syndicate Bank will offer the entire bouquet of UTI Mutual Fund's schemes through its 2713 branches in India. With this alliance, customers of Syndicate Bank will get easy access to invest in the various schemes of UTI Mutual Fund at the branches where they do their banking transactions. The tie-up will also enable UTI Mutual Fund to offer its comprehensive range of mutual fund products to a wider segment of the society.

Barora Pioneer AMC has announced a strategic expansion plan to strengthen its reach to investors in the remotest corner of the country by tying up with Karvy Computershare Investor Service Centres to provide Investor Services facility at 203 locations. With effect from October 1, 2012, Baroda Pioneer Mutual Fund has started accepting transactions in an additional 126 cities, in addition to the 77 locations already active.

AIG Global Investment Group Mutual Fund has announced its name change to Pine Bridge Mutual Fund effective October 6, 2012. Accordingly, all its scheme will be renamed.

HDFC Mutual Fund has bagged the best overall fund award by Lipper for 2012. The award is given by Lipper, a leading fund research organisation, to Indian funds that have consistently delivered a strong risk-adjusted performance. Last year, Fidelity Mutual fund had won the best overall fund award. This year, Fidelity Mutual Fund has bagged the best equity fund house award. HDFC Mutual Fund also bagged the best mixed asset group award for 2012. Four of its schemes have picked individual honours as well. Escorts Mutual Fund bagged the Lipper group award for the best bond fund. However, its schemes did not figure in the individual awards list. In total, ICICI Prudential Asset Management Company won seven awards, followed by HDFC Asset Management Company with six awards, including four in the hybrid fund category. HDFC Prudence was adjudged the best scheme in the 3-year and 10-year periods. Three other hybrid schemes, HDFC Children's Gift Fund (Investment Plan), HDFC Balanced and HDFC Children's Gift Fund (Savings Plan) were top performers in the 3-year, 5-year and 10-year periods in their respective categories.

At the current AUM, the industry is likely to spend Rs 149 crore annually in educating investors about mutual funds. Fund houses are required to set aside two basis points from their net assets, which at current AUM translates into Rs 149 crore annually, towards educating investors. If utilised well, it could, besides increasing investor awareness, also help in the expansion of the market for mutual funds which is somewhat stagnating for a variety of reasons. Out of this Rs 149 crore, the top 15 AMCs which hold 88% of industry’s assets will account for a major chunk of the industry spend. The next 29 AMCs will spend Rs 18 crore. So far, AMCs have been conducting five investor awareness campaigns every month at AMFI’s behest. According to AMFI, from May 2010 to August 2012, 36 AMCs have conducted 22,765 programs in 405 cities covering 766,670 participants. AMFI, with contributions from AMCs, had also run a media campaign last year to promote mutual funds. One possible way to utilise the two basis points is to pool resources and run a similar campaign on a bigger scale. 

Sundeep Sikka of Reliance Mutual Fund will also continue to serve as Vice-chairman of AMFI. The Board of Directors of AMFI Board has re-elected Milind Barve of HDFC Mutual Fund as the Chairman. Sundeep Sikka of Reliance Mutual Fund has also been re-elected as Vice-Chairman. Both will hold office till the next Annual General Meeting. Milind Barve was appointed as the chairman of AMFI in March 2011 after U K Sinha assumed charge at SEBI. Sundeep Sikka was also appointed in the same year as AMFI’s vice-chairman. AMFI is governed by a 15-member board of directors.

…to be continued

NFO NEST

October 2012

Capital market regulator, SEBI, has issued a general order with rejection criteria for draft offer documents for the protection of interest of investors. In case of rejection of draft offer document, the communication in writing will contain the reasons. With SEBI being stringent about rejection criteria for draft offer documents and vocal about the under-performance of existing equity funds, fund houses have been careful about launching new offers. In addition, the filings of equity fund offer documents had dried up in recent months in the wake of weak stock market trends. However, the stock market rallied by about 8% in September 2012 on the back of a slew of economic reform measures initiated by the Government. With stock markets getting into a buoyant mode, mutual funds are stepping up their draft filings with the regulator SEBI for new equity schemes. As per data available with SEBI, draft offer documents were filed for at least three equity mutual fund schemes in September 2012. In contrast, not a single draft offer was filed for equity mutual fund scheme in August 2012, while papers were filed for just one stock-focused scheme in the month of July 2012.

There is a sole hybrid capital protection-oriented NFO amidst the deluge of FMPs in the October 2012 NFO NEST, similar to the September 2012 NFO NEST.

Axis Capital Protection-oriented Fund – Series V

Opens: October 15, 2012

Closes: October 29, 2012

Axis Capital Protection-oriented Fund – Series V aims to protect the capital by investing in a portfolio of debt and money market instruments that mature on or before the maturity of the scheme. The scheme aims to provide capital appreciation through exposure in equity and equity related instruments. The fund will be managed by Mr. R. Siva Kumar.

R* Shares Consumption Fund, R* Dividend Opportunities Fund, India Bulls Balanced Fund, and Union KBC Capital Protection Oriented Fund Series 2 and 3 are expected to be launched in the coming months.

GEM GAZE

October 2012

Sector funds have earned an average return of 11% since their inception. The average return would have been 13% since inception, had you invested in diversified equity funds. But if you are intent on buying a sector fund, which ones should you look at and which are the ones to avoid? The October 2012 GEMGAZE provides the answer.

In view of the prolonged lackluster performance, Reliance Diversified Power Sector Fund has been shown the door. Rest of the funds in the October 2011 GEMGAZE have retained their preeminent position as GEMs in the October 2012 GEMGAZE.

ICICI Prudential Infrastructure Fund Gem

Long-term potential

ICICI Prudential Infrastructure is the largest fund in the infrastructure category, at Rs. 1879 crores. For a sectoral fund, the fund is well diversified with nearly 46 stocks and 75% of the portfolio is large-cap oriented. Moreover, there is lower concentration risk as it is a thematic fund. The top three sectors finance, energy, and metals account for 66% of the portfolio. The top three holdings alone account for nearly 21% of the fund’s portfolio and ICICI Bank is the fund’s top holding with a weightage of 7.77%. In the past one year, the fund has earned a return of 11.29% as against the category average of 9.96%. The expense ratio is 1.84% and the turnover ratio is 24%. ICICI Prudential Infrastructure Fund is the best performing infrastructure fund despite the lacklustre performance of this sector in the past year. This laggard performance is actually an investment opportunity in disguise for the long-term investor since the infrastructure sector holds potential to generate long term returns for the patient investor as infrastructure projects have long gestation periods.

 

Magnum FMCG Fund Gem

On a fast track

In the past one year, the Rs 108 crore Magnum FMCG Fund is perched at the top and its AUM has almost doubled from Rs 56 crore last year. There are 18 stocks in the portfolio and 53% of the assets are in large caps. Owing to its small size, the fund could stay with a compact portfolio of under 20 stocks through the year, an advantage given the limited universe of FMCG stocks. The one-year return of the fund is 47.26% as against the category average of 42.56%. Over the three and five year periods, the fund posted 40.21% and 22.23% of CAGR, respectively. And for the same time frame, the key benchmark indices Sensex and Nifty gained 5.3% and 5.09% respectively, while the BSE FMCG and CNX FMCG gained 30.29% and 29.61%, respectively for the same period. The expense ratio is 2.47% and the portfolio turnover ratio is 94%. Most FMCG stocks have proved to be more than just defensive bets over the last two years. They remained steady through the worst phase of inflation, when cost pressures increased, margins plunged, and demand shrunk. The FMCG industry trends continue to be positive and earnings growth is likely to be strong in the near term as well.

Reliance Banking Fund Gem

Beating the benchmark

Reliance Banking Fund invests predominantly in large and midcap financial companies. 57% of the portfolio consists of large caps. There are 18 stocks in the portfolio. Reliance Banking Fund has not only outperformed its benchmark, the CNX Bank Index but has also outperformed other banking sector funds. The current AUM of the fund is Rs 1729 crores and the one-year return is 30.10% as against the category average return of 27.43%. Reliance Banking Fund delivered 20% and 23% annualised returns over three-year and five-year periods, a good 4.8 percentage points and 7.5 percentage points higher than its benchmark. While 70% of the benchmark Bank Nifty's weight is split between ICICI Bank, HDFC Bank, and SBI, Reliance Banking Fund’s portfolio is well diversified with no stock accounting for more than 15% of the portfolio. The fund, however, has high exposure to public sector banks, which may result in short-term underperformance given the lingering concerns. Mid-cap banks and NBFCs, though, helped it outperform its benchmark consistently in the last one-and-a half-years. The fund outperformed its benchmark 87% of the time over the last four years, on a rolling return basis. The expense ratio is 1.93% and the portfolio turnover ratio is 68%.

Reliance Pharma Fund Gem

Consistent outperformer

This Rs 635 crore fund typically has a portfolio of 20 stocks and often takes concentrated bets. Like other pharma funds, this fund also took off as a large-cap, but gradually shifted towards mid-cap stocks. Its interest in small-cap stocks has also increased over time. At present, 42% of the assets are in large caps. Its one-year return is 19.77% as against the category average of 21.71%. The Reliance Pharma Fund has been outperforming its peers since its inception. This shows the quality of stocks that the fund has got in its portfolio. As on May 8, 2012, the fund has a five-year CAGR return of 21.66%, which came in above that of its benchmark returns, which delivered 12.73% over the same period of time. The expense ratio is 2.22% and the portfolio turnover ratio is 31%.

ICICI Prudential Technology Fund Gem

Old is gold

One of the oldest funds in this category, this fund returned 28.13% in the past one year as against the category average return of 16.42%. Currently around 91% of the Rs 108 crore corpus is invested in the technology sector, with Infosys alone accounting for 34% of the portfolio. The portfolio is highly concentrated with just 10 stocks. But 61% of the portfolio is large cap-oriented. The expense ratio is 2.49% and the portfolio turnover ratio is 28%.

FUND FLAVOUR

October 2012

One-way ticket to glory?

In the heydays of the bull-run, investors considered sectoral funds as their one-way ticket to gains and glory. Things, however, changed when markets tumbled and sectoral funds started under performing broader markets much to the disappointment of investors in these funds. Sectoral funds - mainly investing in infrastructure, banking, IT, FMCG, and pharma stocks - had assets worth Rs 19,000 crore under management at the end of January 2012. Barring FMCG and pharma funds, no other category of sectoral funds has generated decent returns for investors in the past one year.

Infrastructure Funds

Light at the end of the tunnel…

Infrastructure funds have been the biggest casuality in the stock market downturn. A bleak sectoral outlook and underperformance of funds prompted investors to redeem about Rs 3,500 crore worth of investments from core sector funds last year. Policy inaction, higher interest rates, and slow infrastructure building activity are touted to be the major reasons for the underperformance of infrastructure stocks. Infrastructure funds have been the worst performers of the year with most funds logging negative returns in the range of 10 to 15%. The ET Construction Index, which includes most infrastructure stocks, has fallen over 17% over in the past one year. During the same period, CNX Infrastructure has outpaced BSE-200 only twice on monthly returns basis (i.e. in June 2011 and January 2012). Policy paralysis of Government, bottlenecks in funding, and high interest rate scenario have been delaying the revival of corporate capex cycle. But investors in infrastructure funds are expected to soon recoup most of the losses. The 12th Five-year Plan, which aims at 9.0%-9.5% growth, came into effect from April 1, 2012. To achieve this growth rate, heavy investment of around Rs 45,00,000 crore needs to be done in sectors such as electricity, roads and bridges, telecommunications, railways and irrigation to name a few. Infrastructure builders will also benefit from a probable decline in interest rates. The Finance Ministry has announced guidelines for establishing infrastructure debt funds. Recently, LIC, Bank of Baroda, ICICI Bank, and Citicorp Finance India have, in joint venture, set India's first Infrastructure debt fund with an initial capital of USD 2 billion. Unlike an IT sector fund, infrastructure funds are not focused on one area (or segment) of business. The sector covers infra builders, construction companies, engineering companies, and infrastructure financing companies, giving fund managers enough room to straddle between companies within the sector.

Banking Funds

Scope for improvement

Bank shares have under performed broader markets over the past year on concerns of higher interest rates, rising non-performing assets, and slow credit growth. The BSE Bankex Index has gained just about 0.5% over the past one year. However, the sentiment has turned slightly positive after the Reserve Bank of India announced rate cuts in January 2012. Banks are expected to perform well once rates start hitting the downward trail. Net interest margins are also likely to improve in the upcoming quarters. Funds with higher PSU banks in their portfolios are likely to generate better returns as PSU stocks have been oversold and under-owned in the market currently.

Technology Funds

Concentrated risk and volatility…

IT funds started performing towards the fag end of 2011 - mainly on the back of a depreciating rupee. IT shares have also appreciated on talks of stable growth in the US and continued order flows from American software giants. The general consensus among analysts is that IT companies will continue to log positive revenue growth in 2012. The weak rupee will also benefit IT companies significantly in 2012. Diversification is lowest in the IT sector. IT fund managers do not have the luxury to straddle between different businesses within the IT vertical. Investors, who do not have any binding reason or logic to invest in the sector, may exit at gains and redeploy the money in diversified fund portfolios.

Auto Funds

Auto Ancillaries to the rescue…

Domestic mutual fund managers have taken a fancy for the auto-ancillary industry as an alternative investment option in recent times as the auto sector has slowed down. The mutual fund industry has deployed 2.46% of its total equity investments in this sector in August 2012 alone against 1.99% at the beginning of 2012. This is the highest percentage investment made by the industry in this sector since January 2011. The past few years have seen a stupendous sales growth in the auto sector, which has created a healthy demand for replacement of auto parts today. Investment interest is especially high for companies catering to the replacement market like batteries and tyres. The auto-ancillary companies are holding firm in uncertain times and the industry has logged average sales growth of 30% in the past three quarters. Even though the demand from the original equipment manufacturers has dipped, the replacement market remains strong, which has helped these companies improve their operating margins to 20% from 15% over the past three quarters. Though sector performance is robust, high valuations may impact future investments. The 12-month trailing price-earnings multiple for the ET Auto Ancillary Index stands at 21.19, pretty close to its 2007 peak of 25.29, hinting that the future growth may have already been priced in. However, if industry experts are to be believed, these valuations may be re-rated if margin expansion story plays out as anticipated.

FMCG Funds

Kings of bad times…

Funds investing in FMCG companies have lived up to their reputation of being 'kings of bad times'. The BSE FMCG Index has significantly outperformed the Sensex during the last one year and this trend has been maintained in the last quarter on expectations of continuing momentum in growth that the sector has been witnessing. The sector is expected to report a double-digit revenue and profit growth in the next year driven by improving demand and pricing scenario and benefits from capacities set up in tax free zones. Raw material prices are slated to go down with prices of palm oil, milk, and soda ash declining. With continued rise in crude oil prices, the companies are expected to incur high packaging costs. Companies are expected to record margin expansion in the range of 20-520 bps.

Pharma Funds

A safe bet…

Pharma funds have managed to perform above average and have delivered CAGR of 28.8% (average of pharma funds) in the last three years and CAGR of 13.28% in five years. Meanwhile, the BSE Healthcare index rose 25.25% and 12.19% respectively for the same time frame. Volatile market conditions also prompted investors to flock to defensive sectors, helping the pharma category of funds to appear among the top gainers.

PSU Funds

Phoenix from the ashes?

Over the past 12 months, mutual funds have significantly pared their holdings in blue chip state-owned undertakings amid concerns that the Government is increasingly intervening in their business. Domestic mutual funds and UTI have reduced their holding in five out of the six PSUs that are part of the Sensex. While PSUs have gone out of favour, 14 of the remaining 24 companies on the Sensex have seen the stake of mutual funds in them rise. In nine others, mutual funds cut their share. The waning interest has not only eroded the valuation of PSUs, but also pulled down the broad market movement. In the 12 months ending March 31, 2012, the 30-share Sensex lost 10.5%. But the 60-stock PSU index fell much more — 18.4%. More significantly, the 60 PSUs lost more in market capitalisation in absolute terms than the Sensex itself. While the Sensex market cap dropped 9.1% or Rs 2.94 lakh crore to Rs 29.28 lakh crore during the last financial year, the market cap of the 60 PSUs plunged 18% or Rs 3.5 lakh crore to Rs 16.09 lakh crore.

After a sluggish performance in 2012 till the end of August 2012, PSU Banking Sector Funds have made a strong come back in September 2012. Kotak PSU Bank ETF appeared at the top in the list of banking sector funds with 18.42% returns and Goldman Sachs PSU Bank BEES followed it with 18.37% returns, as on September 26, 2012. The PSU banking space suffered after first quarter results were announced. Fall in margins due to slippages and high cost deposits along with declining CASA levels were the main culprits. Analyst community was wary of deteriorating asset quality of PSU banks. But as the Union Government opted for a slew of reform measures, the PSU banking space has seen renewed investor interest. The announcement on state electricity boards' loans restructuring has further pushed up PSU bank stocks. Market participants expect PSU Banks to benefit from lower interest rates and improvement in asset quality over the next one year.

 

Handle With Care!

Sectoral funds should be chosen as the investment instrument only if the funds  abide by the mandate of being a sector-oriented fund, has a good track record, and the investor is comfortable with the growth potential of a particular sector. If the sector tends to be cyclical in nature, investment can be made for a relatively shorter period of 3-5 years. Over a longer period of 10 years or so, returns from these funds even out and cannot match the performance of diversified equity funds. However, there are sectors such as pharma, FMCG, IT, which are not cyclical in nature and one does not need to book profit on a regular basis. Sectoral funds should not constitute more than 10% of the portfolio.