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Mutual funds rejigging portfolios: What's in, what's out

Mutual funds rejigging portfolios: What's in, what's out

Mutual funds are churning portfolios after the economic reforms announced by the government in September and October. Since mutual funds manage huge money, it helps to know where they are investing, which shows their outlook on various sectors and stocks.

Are mutual funds churning portfolios after the economic reforms announced by the government in September and October? Yes, a few adjustments are certainly on.

Since mutual funds manage huge money, it helps to know where they are investing, which shows their outlook on various sectors and stocks.

VALUE BUYING

Anup Maheshwari, executive vice president and head, equities and corporate strategy, DSP BlackRock Mutual Fund, is changing the composition of the portfolios. "The idea is to benefit from value opportunities by investing in stocks at attractive price points," he says. These are companies trading below book values (preferably 50 per cent lower).

ARCHIVE: Do unique MF products offer good returns? "Since we follow a price view rather than wait for the actual evidence, some stocks we have bought may not perform well for a while. But when the outlook changes, they will make up for their one-year performance in a month," he says.

Maheshwari says there are many stocks in public sector bank, metal, capital goods and engineering & construction spaces that offer such opportunities.

DSPBR Top 100 Equity Fund, which manages Rs 3,500 crore, has increased exposure to L&T, Reliance Industries and HDFC Bank (September 30 Vs August 31). L&T is the only engineering company to which a number of funds have increased allocation.

CUTTING EXPOSURE

The fund has reduced exposure to stocks from fast moving consumer goods, or FMCG, and pharmaceutical sectors such as HUL, Marico and Lupin, as well as power companies like Tata Power, Power Finance Corporation and NTPC.

Maheshwari says valuations of FMCG and pharmaceutical sectors are pricing in too much growth. "We thought it's better to take money off the table and invest in areas where we may see growth," he says. The fund has invested 22 per cent money into banks, mostly private sector banks. The share of public sector banks has risen from nil to 4 per cent.

Banks have been bogged down by stress on books, says Maheshwari. In the last cycle, that is, late 1990s, the sector, especially public sector banks, faced a similar situation, before falling interest rates came to their rescue. A fall in rates helps banks make gains in their investment books, which allows them to write off non-performing loans.

The fund's beta, a measure of volatility, has risen from 0.92 to 0.97.

BIG SHIFT

If we take a look at the portfolio of some of the bigger equity schemes, ICICI Prudential Dynamic Fund and the ICICI Prudential Focused Bluechip Equity Fund, which manage about Rs 4,000 crore each, have added capital-intensive and rate-sensitive sectors and cut exposure to stocks less likely to outperform in this environment.

MF reforms: What they mean for you
The portfolio of ICICI Prudential's Dynamic Plan shows reduced exposure to software (down from 15.2 per cent on August 30 to 11.7 per cent on September 30) and automobile (by half to 2.6 per cent).

Sankaran Naren, CIO, equity, ICICI Prudential AMC, says India's reforms and the third round of quantitative easing or QE3 by the US have increased fund inflows. As a result, the rupee has risen from Rs 57 to Rs 53. "In such a scenario, companies from the technology sector become unattractive than before, as their revenues are in dollars," he says.

The fund had 18 per cent exposure to the technology sector in December 2011. This is now down to 12 per cent. It has increased exposure to the oil sector by adding Cairn India (6.7 per cent), which is now its second most widely-held stock. Naren says they have put money in sectors more reliant on QE3 rather than the domestic changes. He says QE3 will likely lead to an increase in oil prices, benefiting upstream oil companies such as Cairn.

But the fund's beta has remained flat. The fund's holding across top three sectors-pharmaceutical, telecom and banks-has been consistent. Although these sectors have rallied in a sideways market and have good fundamentals, they are not cheap anymore.

Further, it may be difficult for consumer durables to sustain the current pace of growth as any reduction in fiscal deficit will require a cut in consumption and these stocks have priced in high growth, says Naren. Even though funds are holding on to these sectors, new investments are scarce. The dividend yield of Dynamic Fund has fallen from 1.53 to 1.28.

PICKING RATE-SENSITIVES

A look at another fund from its stable, ICICI Prudential Focused Bluechip Fund, shows an increase in exposure to the construction sector with the addition of L&T (2.2 per cent) and banks. The fund has added State Bank of India or SBI (5.7 per cent) and cut exposure to software companies from 16.5 per cent on August 31 to 14.5 per cent on September 30.

Naren says the biggest problems India is facing are fiscal and current account deficits. So, steps to reduce these, such as the diesel price increase, are positive. Thus, it makes sense to invest in rate-sensitive sectors. Industrial, capital goods and financial sectors will gain from fiscal consolidation, he says.

A big fund by Reliance Asset Management Company, Reliance Vision Fund, has increased exposure to banks from 13 per cent to 18 per cent (On September 30 Vs August 31), its biggest holding being SBI (9 per cent).

Madhusudan Kela, chief investment strategist, Reliance Capital, is positive on banks and financial services owing to turnaround in the interest-rate cycle and falling inflation. He says some real estate companies may perform well as their balance sheets are better than they were in 2008 while their market capitalisation is considerably lower. The fund has cut exposure to the pharmaceutical sector from 18 per cent to 14 per cent. At the start of the year, the sector was its biggest holding (20 per cent). This perhaps shows the change in perception towards defensive stocks.


INDEX HEAVYWEIGHTS

Investors must note that most of these stocks are a large part of the funds' portfolios as they have a high weight in the benchmark indices. The list of top stocks held by fund houses on October 31 is skewed towards a few sectors, for instance, banking. HDFC Top 200, the largest equity fund that manages Rs 10,000 crore, has invested about 31 per cent funds in banks. This figure was 22 per cent in December 2011.

SHOULD YOU TRACK?

Gaurav Mashruwala, certified financial planner, says only investors with domain knowledge should track portfolios of mutual funds. "Investors should not only track the portfolio at the end of the month but also calculate various ratios such as beta, standard deviation and Sharpe," he says. Hence, any judgment on the basis of month-end portfolios alone will not suffice as there are many aspects that fund managers look at. It is important to ensure that the fund manager is adhering to the fund's stated philosophy.

WAY FORWARD

Although there have seen some positive developments, experts say any further uptick in the markets requires execution of a set of reforms. "We could see pick-up in investments from public sector companies soon as the government is pushing hard for it, while private sector investments could come after the elections when rates fall sufficiently," he says. The credit policy will play a crucial role in investment activity; however, it seems like a slow process.

Going forward we could see an increase in allocation to PSUs in view of the government's disinvestment target of more than Rs 40,000 crore. Although this will improve market sentiment, it will limit any rally due to the flood of new shares into the market.