Ask any investor the questions foremost on his mind and he’ll list three: Is the worst finally behind us? Has confidence in the Indian economy been restored? Is there now an appetite for risk?
Going by consensus, the answer to all these questions is yes. There are many positives on which this newfound optimism is based. The Lok Sabha election and the formation of a stable government at the centre, for one, is a big factor. The gross domestic product (GDP) numbers are another positive. Our GDP—which grew by 6.7% in 2008-09—is a plus. It may be lower than the government’s earlier estimate of 7.1%, but is high enough to ensure that India remains among the world’s fastest growing economies.
The Markit purchasing managers’ index (PMI), an on-the-ground survey of 500 companies to gauge the manufacturing mood in the country, threw up some good news. The PMI shows that the sector reached the bottom in March, with the index going above 50 in April (53.3%) and May (55.7%). A reading above 50 indicates expansion in activity as compared with the previous month.
What’s even more encouraging is that the New Orders sub-index rose to 59.1% in May, the highest it has touched since September (62.6%). All this has led economists to revise their GDP forecasts, or at least not downgrade them further.
Recently, Chris Wood, global equity strategist, CLSA Asia-Pacific Markets, said in a television talk that the formation of a stable government at the centre was a major catalyst for foreigners to reinvest in India and logically, the sector that should benefit—according to him— would be infrastructure. Asset managers too seem to have trained their guns on infrastructure.
However, if you are an investor, keep in mind that when a fund manager talks about infrastructure, he refers more to a thematic view than a sectoral one.
The logical outcome is that the infrastructure theme tends to be all-encompassing and will include real estate, construction, metals, engineering, cement, power, power equipment, energy, oil and gas and related industries, mining, telecommunications, ports and communication. Some may also include healthcare and related industries. Sometimes, banking is clubbed under this theme too. Even if it is not, it is another sector to look out for since it is the channel from where the infrastructure build-up or consumption story will take place. But the issue remains as to where they will look, in terms of stocks. However, while valuation factors may make fund managers take different calls on which stocks to consider, the infrastructure sector’s inherent attractiveness does not change for them.
If you are keen on playing the theme and believe it to be a thrust area with the new government, take a look at the three top infrastructure funds in the market.
Tata Infrastructure | Uncommon Outlook
After underperforming in all three quarters of the first year of its launch (2005), this fund has managed to beat the annual category average every year, with its best performance in 2006, when it was ranked second in its category with a 60.32% return (category average: 54.20%).
The fund has a very broad definition of infrastructure which encompasses the regular infrastructure sectors as well as housing, banking and financial services, and healthcare and related industries. The fund’s portfolio has never gone below 44 stocks, but has crossed 60 on numerous occasions. And single-stock allocation has been circuited at 7%. Right now, the fund manager is betting on financials, energy and engineering.
ICICI Prudential Infrastructure | Alpha Generator
The highest alpha generator in the category, its returns are impressive. Though launched in August 2005, it has emerged as a strong contender only since 2007, when its back-to-back annual performance put it ahead of its peers. It beat the category average in 2006 but was the best performer in 2007 and 2008. In the first quarter of 2009, it delivered 1.27% (category average: -5.32%). It also has the highest three-year annualized return (20.74%) among infrastructure funds (as on 31 May). In 2008, it made the right moves: The fund hiked its exposure to large caps to average at around 77%. But its ability to contain the downside was helped in a large way by heavy debt exposure and the liberal use of derivatives. But where the fund got a miss was in the recent rally (9 March-31 May), with a return of just 62.72%, way below the category average of 81.74%.
In 2006, UTI was the best performer among all equity funds. In 2007, it was the fund manager’s ability to deliver yet remain grounded that stood out. Ahmed Raza Khan / Mint
UTI Infrastructure Pioneering Positives
Besides being its initiator, this fund has proved the merit of its theme. It got off to an impressive start by beating its only peer—DSP BlackRock TIGER—in 2005. In 2006, it was the best performer among all equity funds. In 2007, it was the fund manager’s ability to deliver yet remain grounded that stood out. Though the market was on a roll and its peers bet on mid- and small-caps, this fund saw its large-cap exposure gradually rise over the year.
The fund manager typically adheres to a buy-and-hold strategy, with his favourite picks being Bhel, RIL, L&T and Bharti Airtel. Individual stock holdings have never crossed 7%, barring Reliance Industries Ltd. This fund is as close as you can get to pure infrastructure play.
Fund investors bounce back
The latest stock market rally has provided a temporary respite from the prevailing pessimism. If we look at the period between 9 March and 30 June, the Sensex delivered an astounding return of 77%. The BSE small-cap index returned 100%. It is obvious that the wounds inflicted on fund investors by the carnage of 2008 have yet to heal. But there were a dozen funds that gave returns of over 100% during this period. And two of them almost made it to that mark—Sundaram BNP Paribas Capex Opp Reg-G, with a return of 99.30%, and Sundaram BNP Paribas Select Midcap Reg, with a 99.26% return.
Mutual funds suspend new sales
Mutual funds are not always looking at increasing their assets under management (AUM). Three funds—Kotak Equity Arbitrage, ICICI Prudential Blended Plan A and ICICI Prudential Equity and Derivative Income Optimizer Plan (both retail and institutional plans), all arbitrage funds—have suspended new sales. However, existing investors who had chosen the systematic investment plan (SIP) or systematic transfer plan (STP) can continue to invest. So from 1 July, fresh purchases, additional purchases and switch-ins are not permitted. The average AUM of the arbitrage funds category in June stood at Rs4,920 crore, which is a 97% increase from March (Rs2,425 crore). This is disappointing not just for new investors but even for current ones. These funds are categorized as equity and get the same tax treatment as other equity funds.
Mutual fund managers fail to capitalize on the market rally
The markets have been rising, albeit in a very volatile manner, and concerns were voiced, starting March, that mutual fund managers had failed to capitalize on the market rally as they were sitting on their cash rather than investing it. It seems to be the same even now. Cash positions maintained by different mutual fund houses in their open-ended equity category have not undergone any drastic change, if one looks at the figures between May and June. Fund houses kept 9.1% of their assets in open-ended equity funds in cash in June; it was almost the same at 9.4% in May.
Why there is a recent deluge of NFOs
The market environment isn’t as precarious as it was at the start of the year. But the change in sentiment is not the only reason why asset management companies (AMCs) are coming out with new fund offerings (NFOs). From 1 August, Sebi has mandated that fund entry loads be scrapped. But for NFOs launched before 1 August, the old rules apply. They will be able to charge entry loads. This seems to be the primary reason for the recent deluge of NFOs. AMCs want to launch new schemes before the ruling comes into effect and take last-minute advantage of the soon-to-be-extinct entry load.
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