Every dog has its day. And the old economy comeback proves that. As this happens, it is beginning to show on funds as well. And the key beneficiary of the boom are once again the well-diversified funds and old-economy focussed sector funds. This change in investment strategy has given a fresh lease of life to old-fashioned funds. Of course there are fundamental reasons behind the change in outlook. The key reason is the declining interest in tech stocks besides the attractive valuation of old economy stocks, given the market's prolonged disinterest, which was busy in the tech party. This apart, the takeovers moves, bank mergers, run up in cement stocks on a standard cyclical upswing and renewed interest in PSU stocks with announcements of dis-investment and strategic sale have boosted the sentiment. Good enough reasons for a more broad based and hopefully a sustainable rally in old economy stocks.
Incidentally, last February's top technology stocks and funds are now at the bottom of the heap with below average returns. "No longer is the investment pattern skewed totally in favour of a few limited sectors. The implication therefore is that the risks of a single sector are not likely to impact overall market performance, as happened in the last year,'' says Divya Krishnan, Chief Investment Officer, SBI Mutual Fund.
The aggressive buying by foreign institutional investors, which has largely been concentrated in economy and PSU stocks, has further bolstered returns. With a double dose of Fed's magic potion, foreign investments are pouring in markets with relatively cheap assets. Since the beginning of the year, FIIs are estimated to have pumped in a net of Rs 4400 crore in equities. "We are positively and pleasantly surprised by the government's bold decisions to privatise VSNL and CMC. Decisions like these can change long held negative perceptions about India and bring in significant investments,'' says Samir Arora, head, Asian Emerging markets, Alliance Capital.
With a broadbased rally gradually percolating to second-tier (mid-cap) stocks as well; funds with a higher exposure to this segment of equities are also witnessing their NAV gallop. The case in point is the mid-cap focussed Kothari Pioneer Prima Fund, which has gone ballistic since the start of the calendar. The fund invests in fast growing mid and small cap stocks. With a well spread out portfolio from auto ancillaries to metals and textiles to electric equipment, the fund has gained sharply - 26% in the one month ended February 12, 2001.
"The buying has been more broadbased on expectations that the budget will push reforms further and boost infrastructure," says K N Siva Subramanian at Kothari Pioneer. Adds Krishnan, "the resurgence of interest in old economy stocks has actually resulted in them outperforming the TMT sector and the rally across a broader spectrum of stocks and sectors is a healthy sign for the stock markets."
Takeovers and acquisition attempts are also boosting fund returns. Corporates with huge asset base and rock bottom stock prices have become a "sitting duck" for predators and have witnessed a spurt in both volumes and prices. Take for example Taurus Starshare. The fund, with an 18% exposure to cement manufacturer Jai Prakash Industries, has gained 13.63% return in the last one month.
While sector specific funds like UTI Petro have obviously gained by virtue of their investments in the fancied sectors, some funds have been quick to change tack from technology stocks to a more diversified portfolio. For instance, Zurich India Top 200 from Zurich Asset Management has slashed its technology exposure from 39% in September 2000 to a mere 4.5% in January 2001. The "diversification" mantra has seen the fund hike its exposure to sectors like automobile, chemicals, refining, power, engineering and diversified companies like Larsen & Toubro and Grasim Industries. The rally in economy stocks has seen the fund gain nearly 12% in the last one month and the fund plans to pay a dividend later this month.
Among the top performing sector funds, UTI's Petro Fund has been a chart buster with a return of 27%. With investments dedicated to the petroleum and refining sectors, the fund has its major investments in Reliance Industries, IPCL, Reliance Petroleum, IBP, BPCL and ONGC. Alliance Basic Industries is another beneficiary from the galloping old economy stocks. After languishing below par since launch in January 2000, the fund's net asset value has managed to break past the par level with a 13% return in the last one month. With investments in companies sensitive to economic cycles and commodity pricing cycles, the fund has top holdings in HDFC Bank, Sterlite Industries, Grasim Industries, Reliance and Larsen & Toubro.
Contrarion funds like Magnum Contra from SBI Mutual Fund have also been finally rewarded with their unflinching faith in old economy stocks. Although still below par, the fund has been one of the front runners with investments in stocks like HPCL, HDFC Bank, BHEL, Reliance Industries and Container Corporation. With technology stocks now falling by the wayside, it's probably time for the fund to go tech-heavy! Another fund in its league, Resurgent India Equity Fund has also seen its thematic investment reap handsome returns. The fund concentrates on turnaround companies and acquisition-led opportunities.
So, should investors now start looking favourably at these funds? While this family of funds has had its day out in the sun after a long time, there is surely no sign yet of a sustained long-term performance. The last folly investors would be committing is a re-run of 2000, when they jumped on to the technology bandwagon in hordes for those supernormal returns. The current run is largely linked to the expectation of a growth-oriented budget with significant sops for the economy-related companies. Yet, its too early to comment and take a call.
Moral of the Story
The key issue, which remained unanswered - What is the right strategy? Will tech stocks make a comeback? Will the old economy sustain its momentum? No one knows -- and that's the point. The truth is, sectors rotate. And they usually make their most abrupt changes just when investors have concluded that a new permanent order has set in. The best way to avoid being steamrollered in the rotation is to stay diversified -- and to rebalance.
Smart investors should not try to forecast sectors of the financial markets. Instead, they diversify, spreading their money around in a reasonable way to profit from the rises and avoid being crushed by the declines.
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