Up-and-coming: Is it time to bet on manufacturing funds?

Fund managers and investors alike are fawning over manufacturing funds. Are you missing out?

Manufacturing mutual funds: Is it the right time to invest in them?AI-generated image

dhanak हिंदी में भी पढ़ें read-in-hindi

India is manufacturing like never before, and investors are taking notice. The HSBC India manufacturing PMI index soared to the highest level in 16 years (59.1) in March, 2024.

For the uninitiated, it is a survey-based gauge that indicates whether business conditions, as viewed by supply chain managers, are expanding or contracting. A reading above 50 suggests expansion.

To capitalise on the trend, fund houses, too, are lining up thematic manufacturing funds. Tata AMC's passive offering and an active one from HDFC being the latest additions this month. Over half of the Rs 10,500 crore AUM of manufacturing funds (as of March, 2024) are managed by just three schemes that have been floated in the past one year.

No cookies for guessing how this coincides with the S&P BSE Manufacturing Index's outperformance that began only recently from 2023.

The passive route

Of the eight manufacturing funds in the market, three are passively managed. Their performance can broadly be gauged from the benchmark manufacturing index, which mostly underperformed the broader market in the last few years.

The active route

Taking the active route to invest in the manufacturing theme leaves you with five actively-managed funds. Only two of which are more than a year old - Aditya Birla Sun Life (ABSL) Manufacturing Equity Fund and ICICI Prudential Manufacturing Fund . We put them against the diversified flagship equity funds of their respective AMCs - ABSL Frontline Equity and ICICI Value Discovery.

This was done to gauge how a diversified equity fund with allocation to manufacturing-related stocks fares against standalone manufacturing-focused funds.

Note that a diversified equity fund with an investment universe across the top 500 companies will also have exposure to the manufacturing theme. Manufacturing-related stocks hold 53 per cent weightage in the broader BSE 500 index. The remaining weightage is made up of others like BFSI, technology, communication etc.

  • Thematic manufacturing funds vs diversified flagship funds
    On a five-year basis (period ending May 8, 2024), the two manufacturing funds outdid their flagship counterparts.

    The ABSL Manufacturing Fund grew 19 per cent annually against its flagship fund that returned 17 per cent on an average. The ICICI Manufacturing Fund, too, outpaced the ICICI Value Discovery Fund by nearly three per cent.

    On the face of it, manufacturing funds are the likely winners. But a closer look reveals it's the outlier year of 2023, where they did exceptionally well, that trumps up their headline numbers.
  • Performance prior to 2023
    Until the exceptional gains of 2023, the two manufacturing funds trailed the flagship funds. Between 2019-2022, the ABSL Manufacturing Fund returned nearly 11 per cent per annum against its flagship fund's 14 per cent annual gains. Similarly, the ICICI Manufacturing Fund also lost to the flagship value-fund during this period.
  • Bumping-up the gains

    Exceptional gains in 2023 inflates headline returns of five years (in %)

    Schemes 2019-2022 2023
    ABSL Frontline Equity 13.73 23.90
    ABSL Manufacturing 10.83 33.68
    ICICI Value Discovery 19.11 32.08
    ICICI Manufacturing 17.19 48.55
  • The outlier year
    2023 was a fantastic year for the overall market. The two manufacturing funds (ABSL and ICICI) outgunned the flagship funds by 10 and 16 per cent, respectively, as BFSI took a backseat. Their allocation to PSUs, which vaulted 61 per cent last year, were another reason for the year's outperformance. Last but not least, their laggards from healthcare also turned around in 2023, aiding their returns for the year.

    Hence, raising manufacturing funds' hands as the winner can be problematic, given they underperformed their flagship counterparts till 2022. The exceptional gains of 2023 bumped up their five-year returns.

    Moreover, we wanted to know how they measure against manufacturing stocks present in the diversified equity funds. On this front too, manufacturing funds fall short.

    Our internal estimates revealed that manufacturing-themed stocks in the two standalone funds underperformed similar peers in ABSL Frontline Equity (by 9.5 per cent) and ICICI Value Discovery (by 3.2 per cent), between January 2022 to March 2024. Note that we have considered the funds' performance only from 2022 due to the aberrations in 2020 and 2021 caused by Covid.

Bottom line

  • It's clear that such concentrated funds are highly cyclical in nature. To make money from them, timing the market becomes necessary, which makes them highly risky.
  • Barring the gains in 2023, the manufacturing index has mostly underperformed the market in the last few years. Additionally, stocks of the actively managed funds were also behind peers in diversified schemes.
  • Hence, it is prudent to explore diversified equity funds that counter the concentration risk (manufacturing in this case) present in thematic funds.
  • Most manufacturing funds are relatively new with limited performance history. At Value Research, we advocate for funds that have a long-term track record available for analysis.

Also read: Should you jump on the infrastructure fund gravy train?

Other Categories