Industry bellwether Infosys' dominance can be gauged by the fact that its weight in the S&P BSE IT index has always been close to 45 per cent, based on its free float market capitalisation. Fund-wise too it makes up between 26 per cent and 40 per cent of the total portfolio of the technology funds.
But a new trend has now emerged. A dip in Infosys' fortunes has been evident for past several quarters and despite that, four of the five technology funds (barring BSL New Millennium) have managed to beat the S&P BSE IT index. They have done this by varying the weight of Infosys in their portfolios. Being under- or over-weight has led to better returns owing to compounding. The outperformance varies from 0.19 per cent to 1.71 per cent per annum, on absolute basis.
Foremost reason for this is even though sector-specific, these funds still had the advantage of spreading the risk and hence diversifying within the sector by picking other stocks like HCL Technologies and TCS, whose annualised returns over the last four years have been much higher than Infosys. Also, while it is generally considered that free float market capitalisation based weights lead to better portfolio optimisation, it is not the case every time.