Though not around for too long, AIG Infrastructure and Economic Reform has shown potential. Husain has successfully implemented the fund’s mandate to make it one of the better picks in its category.
Its investment objective permits it to invest in companies that could benefit from potential investments in infrastructure and unfolding economic reforms. Any investor familiar with the infrastructure space will be aware that each fund manager has his own view on what constitutes ‘infrastructure’. Moreover, other government bodies such as the Income Tax department and the Reserve Bank of India (RBI) also have their own definition. At AIG Mutual Fund, they stick to the definition put forth by the Planning Commission.
In this fund, the obvious sectors will be eliminated such as Technology, Pharmaceuticals, Automobiles and Media. Interestingly, even pure Oil & Gas, which translates into refining and exploring, is eliminated - which explains the absence of ONGC and Reliance Industries Ltd. in this portfolio. On the flip side, companies that fall in the transportation segment (pipelines) of the Oil & Gas sector qualify to fit in its investment universe. Real Estate and Construction also fall outside the purview of this fund unless the company gets substantial revenues from building Special Economic Zones (SEZ), airports, ports or other such infrastructure.
One conspicuous aspect is the prevalence of banking stocks in this portfolio which are quite different from the ones found in other similar portfolios. So it’s ironical to hear Husain say that he does not believe Banking is part of Infrastructure. He justifies his Banking exposure under economic reforms. “Banks have to keep lending to grow. Hence, they have to keep raising capital. For every Rs 100 given as a loan, they need Rs 9 as capital. A public sector bank cannot freely raise funds since the government holding has to be a minimum 51 per cent. If they freely raise funds, the government shareholding will drop. So the government has to put in capital for them to grow. This in turn impacts the government’s balance sheet. Some banks got the capital last year, some will get it this year. Till the banks get the capital, their growth is stunted.”
This explains why private banks do not find a place here.
Pricing of Energy (diesel, cooking fuel, coal etc) is another area that falls under economic reforms. The fund’s second largest holding - Coromandel International is also one that is not popular with its peers. This fertilizer company deals with diammonium phosphate (DAP) and benefitted from the government’s decision last year to de-regulate non-urea fertilizer prices. Another beneficiary of the economic reforms process.
Whether by stocks or sectors, this fund is not afraid to go its own way. When the bet on Engineering crossed 30 per cent last year, the category average was less than 15 per cent. Currently, exposure to Financials is way below the category average while that to Services is higher. However, if Husain bet on banking stocks, this fund would have delivered even better returns. He has not been very bullish on public sector banks, two of the reasons being that growth is being stunted by the amount of capital that the government puts in and also because he does not believe they are adequately covered for non-performing assets (NPAs). The fund has been hit with this move.
When Husain took over in 2009, he brought about a substantial change in the portfolio. As a result, there are just two stocks currently that have been around since 2008 - Bharat Electronics Ltd. and Indraprastha Gas Ltd. By and large, the fund manager is fairly active in his movements in and out of stocks. He puts it down to the dynamism in this space - change in regulations, emergence of new sectors and other such factors.
The same vigorous style gets reflected in his asset allocation. The fund is sometimes seen taking substantial cash bets, currently at 20 per cent. While some portfolio managers argue that they do not compromise on being fully invested, that could backfire if it is a sector or thematic fund in question. Once investment is limited to a sector, or a few sectors, when there are periods valuations get stretched to the extremes it could be safer just moving into cash. “We adhere to our strategy of buying cheap when valuations are below fair value and selling when they are above fair value. At times, this strategy may not find sufficient stocks. But we will not purposely deploy the money in a stock which is not attractive at that point in time.”
So even if the wait is sometimes long (the cash allocation from November to January was above 20%), Husain sticks to his guns.
Husain is a bottom-up stock picker who goes by three broad parameters when buying a stock - dominance of the company in its industry, the management quality and ability, and the valuation of the stock. In this fund, he does inch towards a mid-cap tilt because to a large extent the space itself is characterized by smaller companies. Once he narrows down on his picks, he bets on his convictions. Ever since he took over he never exceeded 25 stocks in his portfolio with his top individual bets sometimes crossing 8 per cent. This does give the portfolio a slightly risky tilt but Husain has this far shown that he knows what he is doing
Why we picked this fund
This year AIG Infrastructure and Economic Reform completed three years (the minimum period an equity fund has to be in existence before it gets rated by Value Research). On getting rated, it bagged a 4-star.
Within the ‘Equity: Infrastructure’ category, this fund has made a mark. The annual returns of the fund have always put it in the second quartile slot. However, the current trailing returns show that the fund has a substantial lead over its peers.
The mid-cap bent, a fairly concentrated portfolio and a focused theme make it a pretty risky offering.
What you should be wary about
Such thematic funds should not hog a major chunk of your portfolio. In terms of Infrastructure, there have been numerous headwinds in terms of delays, non-availability of raw material, increased cost of raw material, land acquisition approvals as well as scams (as in the case of Telecom). Investors, once in, need to exercise patience and not fret when the going gets tough - as it invariable will in such focused investments.