Fund movers and shakers

The bull market has turned around the fortunes of some funds while knocking out others. We sift through fund performances and portfolios to find out what’s really changed in this rally





The Nifty is just short of kissing the 10,000 mark. The rally that began in March 2016 has been gaining momentum of late, surpassing key milestones. The resounding victory of the NDA in the March Assembly elections helped the bulls regain their mojo on D-street.

The Sensex has delivered a compounded annualised return (CAGR) of 24 per cent during this rally, up from 23,779 in March 2016 to 32,020 now. But the mid- and small-cap stocks trumped their large-cap peers, helping investors who bet on these stocks to rake in the moolah.

The gush of liquidity has helped light up stock prices despite weak earnings in many sectors. Foreign portfolio investors (FPIs), who have been net buyers over the last five months, have pumped in more than ₹90,000 crore (net) in Indian equities since the start of the rally.

Flush with funds, the domestic mutual fund industry too has been pouring money into the stock market. Close to around ₹75,000 crore has flowed into our markets from mutual funds alone in this period, thanks to sustained retail flows.

So how did equity funds fare in this rally? Were the return rankings reshuffled? We break down fund moves to find out which stocks and sectors were added to the kitty and which fell out of favour during this rally.

Racing ahead

While most equity funds have capitalised on the rally, in each category, some funds have climbed up the return rankings to move up in the pecking order since March 2016. A few funds that were unimpressive performers (fourth quartile in the rankings) have leaped to the top slots (first quartile) during this rally.

We have compared quarterly returns, trailing returns and rolling returns to arrive at these funds. Two time periods have been considered — the rally between March 2013 and March 2016 and the current rally between March 2016 and June 2017. We analysed equity fund behaviour in these periods to see which funds improved their performance, which slipped up, and which managed to hold on.

Three funds from the HDFC stable, which were punished in the past for their preference for public sector banks, energy, industrial and capital goods stocks, made a strong comeback. HDFC TaxSaver, HDFC Top 200 and HDFC Growth delivered spectacular CAGR returns of 38, 35 and 34 per cent, respectively, during this rally. These funds moved up straight from the fourth quartile to the first quartile within their respective categories.

Reliance Diversified Power Sector fund, SBI PSU Fund and ICICI Pru Top 100 Fund also moved into the top quartile slot during the recent rally, clocking CAGR returns of 42, 35 and 31 per cent, respectively.

What drove their ascent? A change in the sector leadership in the stock market did. In the March 2016 to June 2017 period, funds that allocated a higher proportion of their assets to banking and commodity stocks have been clear winners.

The global rally in metal prices rubbed off on stock prices. Commodities that were in a multi-year downtrend witnessed a strong reversal in 2016. China’s fillip to infrastructure projects stimulating demand and hopes of massive infrastructure spending by the US, alongside reduced supply, drove metal prices.

Banking stocks, too, made a strong comeback though the euphoria was not driven by a meaningful turnaround in earnings performance. On the contrary, private banks, which up until 2015-16 managed to keep their heads above water, started to feel the heat of rising asset quality pressure.

But markets are more about expectations than past performance. Hopes of a recovery in credit demand, led by increased investment activity, drove the rally in banking stocks.

Falling back

While some funds managed to move up the charts, there were others that lost their coveted spots. While these funds still managed to deliver double-digit returns, they have fallen to the fourth quartile in their categories during this rally, from the first quartile in the previous one.

This was, again, a function of some sectors losing market favour. Funds having higher allocation to consumption, technology and pharma stocks have taken it on the chin. Pharma stocks have been on the backfoot for some time, due to more regulatory scrutiny by the US drug regulator FDA and pricing pressures in the key US market.

Indian IT stocks are facing multiple headwinds from low exposure to emerging opportunities and rising protectionism. Axis Long Term Equity Fund, which was the market darling within the ELSS category, took a hit during the recent rally (between March 2016 and July 2017) due to relatively higher allocation to pharma (11 per cent) and IT (7-9 per cent) sectors.

Invesco India Business Leaders Fund (14-16 per cent in IT stocks), SBI Magnum Equity Fund (14-16 per cent in IT stocks and 6-8 per cent in pharma) and ICICI Pru Value Discovery fund (7-17 per cent in IT stocks and 8-10 per cent in pharma) were others that slid in the rankings. MNC funds, too, lost their sheen, being overweight on pharma stocks, but underweight on cyclicals and automobiles.

Holding firm

It is not as if all the equity funds were part of this ranking reshuffle. There are a few funds that have navigated the twists and turns in market fancies well and performed both in this market rally and in the previous one, retaining their top quartile slots.

Funds that invest predominantly in mid- and small-cap stocks fall into this category. The spectacular run in mid- and small-caps since September 2013 has paid off for those who have had the stomach for risk.

The Nifty Free Float Midcap 100 index and S&P BSE Small-Cap index indices have delivered 37 per cent and 45 per cent (CAGR), respectively, during this rally (past 18 months).

Funds having relatively higher exposure to these stocks made the most of the opportunities during this rally. Mirae Asset Emerging Bluechip Fund, Reliance Small Cap Fund, Birla SL Pure Value Fund, MOSt Focused 25 Fund and DSPBR Micro-Cap Fund are a few examples.

Some sought, some shunned

The recent rally saw many funds move in and out of the top slots, depending on their stock and sector selection. So which scrips did funds (about 780-odd equity related funds) stock up during this rally and which were the ones that were discarded?

Banking stocks such as HDFC Bank, ICICI Bank, SBI, Kotak Mahindra Bank and IndusInd Bank were added by the most number of funds during the recent rally. HDFC Bank, for instance, was added by 34 more funds between March 2016 and May 2017, ICICI Bank by 62 funds and SBI by 96 funds.

While low credit growth and sharp increase in bad loans have weighed on many banks’ earnings, stocks such as HDFC Bank, Kotak Bank and IndusInd have managed to deliver steady performance on the core front and keep bad loans under check.

However, given the asset quality concerns in Axis Bank, many funds appear to have exited the stock. The count of funds that hold Axis Bank within their portfolio has fallen by 108 between March 2016 and May 2017. Axis Bank’s bad loans more than trebled (from the year ago) to ₹21,200 crore as of March 2017. Interestingly, ICICI Bank, despite deterioration in asset quality, was widely bought.

Other stocks such as Indian Oil Corporation Ltd (149 funds), GAIL (116) and Petronet LNG (106) have also found favour with funds. Aurobindo Pharma, from the beaten pharma sector, was preferred by many funds, given its strong presence in the US market, several launches and healthy product pipeline. About 104 funds added this stock to their kitty. Among the top 10 holdings of equity diversified funds were stocks such as Maruti Suzuki India, ITC and L&T that were added by many funds during this rally. Maruti has benefited from successful launches such as the Ciaz, SX4 S-Cross, Baleno, Vitara Brezza and Ignis. With these launches in hitherto untouched segments, the company has shed its ‘maker of small cars’ image.

On the other hand, Axis Bank, Tata Consultancy Services Ltd and Max Ventures and Industries were stocks where the maximum number of funds pulled out their investment during the last 18 months. Infosys, too, was exited by 44 funds during this rally. Growth for this second largest IT player has been slipping in each of the last four quarters.

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