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Fund managers flee defensives, go for Beta

With the strong government in place, fund managers have changed their view, preferences and portfolio complexion

As the stock markets moved in a sideways crawl for the last six years, equity fund managers sought the shelter of defensive strategies to see them through that phase. So in their multicap funds, they stayed with index and bluechip names and accumulated weights in sectors such as FMCG, pharma and IT, which could grow irrespective of the economic downturn.

But with signs of green shoots in the economy and a strong majority government installed at the Centre, fund managers are now adding on the beta and getting more aggressive, increasing their weights in small and mid-cap stocks as well as core economy and cyclical stocks.

Mid and small cap stocks which have witnessed a strong rally in the past few months are likely to continue its winning run, say managers. Fund managers across the spectrum now want to buy into all the possible opportunities in the mid and small cap segment. However, they are avoiding sectors like fast-moving consumer goods (FMCG), pharmaceutical and IT where valuations have turned too expensive.

In the past six months, mid cap and small cap indices have beaten the broader indices by huge margin. S&P BSE Mid Cap and S&P BSE Small Cap index gained nearly 32 percent and 42 percent respectively while BSE Sensex went up by 18 percent in the last six months. The strong surge was on the expectation of a strong mandate in the election coupled with a reined in fiscal deficit and current account deficit.

With the convincing victory of Bhartiya Janata Party (BJP) and expectation of overall revival in investment cycle, many believe that mid and small cap segment will witness massive growth in the next couple of years. Brahmaprakash Singh, ED and CIO-Equity at Pramerica MF say, “Midcaps are likely to do well going forward and I would like to be buyer into almost every sector. Having said that, current valuations of FMCG sector appears very high and will be out of favor.”

FMCG sector has been considered 'safe' sector for investors looking for predictable margins and stable return during economic crises. But now with many stocks of FMCG sector trading at over 30 times earnings, looks far attractive than many other cyclicals. “High inflation is talking away the purchasing power of consumer as result the discretionary money at the hand at consumer is fairly limited which will have impact on demand. Inflation even affects every corporates in terms of the cost so this particular sector in our view is going through margin correction,” added Singh.

In the last three year, fund managers had continued to remain highly invested in defensive sectors like FMCG, pharmaceutical and IT. But now with some clarity on economic front they want to ride on the sectors such as infrastructure, industrial and manufacturing which are main beneficiary from the recovery in the economy.

Harshad Patwardhan, ED and head of equities at JP Morgan Asset Management says, “If you look at our current portfolio compared to six months ago, we are underweight on pharmaceutical, consumer and IT sector. On the other hand we are now overweight on sectors such as financials, industrials and infrastructure because these are sectors that will first benefit from the upturn in the economy. Our investment decisions are based purely on earnings outlook and valuations and as a fund house we focus on bottom up stock picking.”

While there are few fund managers who feel that, current market gives enough opportunity into every sector and don't believe in being sector biased at his point of time. Ashish Ranawade, CIO at Union KBC MF says, “I don't think we should afford to have any partiality in any sector in midcap and smallcap segment. As recovery starts taking place, all the sectors will likely to benefit and we don't want to fell left out. We still think that, with new government and recovery in global markets we are heading towards broad based rally in the markets. Even now there is lot of value in the midcaps and small cap stocks and our outlook remains positive.”

Though there has been sharp rally into many mid cap and small cap stocks in the last few months, market participants are expecting some correction in the market. But they are sure that the economy is set to revive and they want to be on the 'right side' of the bull market.