THE BIG STORY. Winning moves of fund Toppers

The Reserve Bank of India’s annual report threw up one interesting trend that mostly went unnoticed — the comeback of retail investors into the stock market. According to the report, over the last three years, investors have been setting aside more of their disposable income for shares and bonds. Markets, fortunately, have been more than kind.

The Indian equity market has been on a roll since the September 2013 lows, shrugging off global events such as the US Fed rate hike and Brexit. The S&P BSE Sensex has gained a handsome 51 per cent since then.

Investors who showed faith in mutual funds and remained invested during this period have been well-rewarded for their patience. An analysis of the top five diversified equity funds across large, multi-cap and mid-cap category reveals that these funds, on an average, delivered returns upwards of 100 per cent since the 2013 lows, far outperforming their benchmark indices.

Birla Sun Life Advantage, the top performing large-cap equity fund, has delivered 145 per cent returns since September 2013. In the multi-cap category, L&T India Value Fund occupied the top slot with returns of 156 per cent while in the mid-cap, Canara Robeco Emerging Equities was the winner with a tidy 218 per cent return. So, how have these funds managed to rake in hefty gains? We delved into each of these 15 funds to find out what bets paid off and the timely exits that helped cap losses.

Post the 2013 blues, the rally that followed in 2014 was mostly led by cyclical stocks that zoomed on hopes of reforms, with the BJP government coming to power. But most of the exuberance soon fizzled out and many funds paid a hefty price for their buoyant expectations.

However, a look at the portfolio of the top performing funds (a total of 15 funds across three categories) reveals that over the last three years, it is, in fact, select cyclical themes that have paid off. Take, for instance, the banking sector, which is always considered a proxy for the economy. While the basic assumption of a revival in investment activity has not quite played out, benign inflationary pressures, softer interest rates and strong growth in retail loans have aided the performance of private banks. Private players have also gained market share at the expense of weaker PSU banks. Similarly, many non-banking finance companies (NBFCs) have also been in focus thanks to their robust performance.

Top performing funds have made a killing, betting on select private bank and NBFC stocks. In 14 out of 15 funds, private banks or financials are now the top holdings. Franklin India Prima Plus, for instance, which returned 119 per cent since 2013 (September), upped its stake in private banks from 16.6 per cent to 26.5 per cent in the last three years. So did Reliance Vision, which almost doubled its holding from 10.6 per cent to 20.9 per cent. In the multi-cap space, Franklin India High Growth Companies Fund, too, has a high allocation of 26.1 per cent.

Stocks such as YES Bank, IndusInd and Kotak Bank have gained a whopping 400, 230 and 131 per cent, respectively, over the last three years. Top performing funds have been steadily increasing their exposure to these stocks, making hefty gains for their investors. GIC Housing Finance, Manappuram Finance, Bajaj Finserv, Cholamandalam Investment and Bajaj Finance are other financials that have rallied sharply — from 250-odd per cent to a heady 900 per cent.

One other cyclical sector that found its way into the portfolio of most top performing funds is cement. Four out of five large-cap funds currently report cement in their top 10 holding. Birla Sun Life Advantage, which had nil exposure to this sector in August 2013, has a 6.5 per cent weightage as of July 2016. SBI Blue Chip has since added on to its holdings, from 1.6 per cent to 4.4 per cent during this period. In the multi-cap space, four out of five funds now have a higher exposure.

Select mid-cap stocks have delivered dizzying returns. Dalmia Bharat has surged 1,204 per cent while Orient Cement and Shree Cement have zoomed by 417 per cent and 350 per cent, respectively. UltraTech Cement, too, has rallied by 152 per cent. A likely consolidation in the cement sector and higher capacity utilisation are seen as key triggers for the sector.

Automobiles and auto ancillaries are others sectors that found favour with funds. In 2013, companies in these sectors faced multiple challenges — tepid demand, high interest rates and elevated fuel prices. Since then, the fortune of these sectors has turned to a significant extent. Many top performing funds have made the most of the rallies in select stocks. Within the large-cap category, the top 5 funds have upped their stake since August 2013. Current holdings are in the 4 to 15 per cent range.

Eicher Motors Ltd was the darling of the stock markets as it surged 606 per cent between August 2013 and July 2016. Strong sales growth of its flagship motorcycle, expansion in its product range, along with a recovery in the truck business, have boosted sentiment. TVS Motors, too, had a strong run with returns of 855 per cent as it gears up for product launches based on its tie-up with BMW for two-wheelers. Tata Motors was also not left behind as it rallied 70 per cent with new product launches from its overseas subsidiary JLR and brighter outlook for domestic commercial vehicles.

Benign crude prices have aided the financial health of refiners and oil marketing companies. Funds increasing their stakes in these stocks have gained handsomely. Hindustan Petroleum has rallied 652 per cent while Bharat Petroleum was up 336 per cent. Indian Oil Corporation’s rally was muted, up 160 per cent. Although stock prices have run up sharply, three out of five large-cap funds continue to retain exposure in these stocks. SBI Magnum Multiplier, in fact, holds almost 10 per cent in such refinery stocks, its second highest holding. In the multicap space, Birla Sun Life Special Situations, which did not have any exposure to this sector, now holds 6.8 per cent.

If top performing funds made a fortune, betting on certain sectors and stocks, they also deftly avoided specific themes, which helped cap losses. A look at the portfolio of the top 5 funds across the market capitalisation spectrum between August 2013 and July 2016 reveals that exposure to software was cut sharply by 14 out of 15 funds. This is not surprising, considering the slowdown in the sector.

Events such as Brexit have also played spoilsport to growth expectations. Birla Sun Life Advantage has cut its holding substantially from 16.7 per cent in September 2013 to 4.1 per cent in July 2016. SBI Magnum Multiplier Fund too cut its allocation from 15.3 per cent to 4.7 per cent. Software was the top holding in August 2013 for these two funds.

The only exception has been Reliance Vision that has kept its faith in the sector by upping its stake from 8.9 per cent to 15.8 per cent during this period.

Funds have also lightened their holding in the pharmaceutical sector. Rocked by headwinds after US-FDA audits, select firms had to contend with adverse observations surrounding their process, resulting in a slowdown in export revenues.

Eleven out of 15 funds have trimmed their exposure to this sector over the past three years. In the past, both IT and Pharma have been considered as safe havens, given their export focus.

Funds also eased up on FMCG, perhaps due to the high valuation sported by these stocks. For instance, Birla Sun Life Advantage cut its exposure to Britannia from 1 to 0.09 per cent, even as the stock gained 317 per cent. The fund, which had a 5 per cent allocation to ITC in August 2013, completely exited its position in this period. SBI Magnum Multiplier Fund, too, exited its 6 per cent allocation to ITC, Colgate and Emami, but allocated 2.8 per cent to Britannia.

Funds also pared exposure to select media companies. Canara Robeco Emerging Equities, a mid-cap fund which had allocated a total of 7.2 per cent to stocks such as DB Corp, HT Media, Jagran Prakashan and Hathaway Cable in August 2013, has since cut its exposure to 1.1 per cent

The other sector that has brutally been pulled out of most funds’ portfolios has been public sector banks. The RBI’s asset quality review, which led to a sharp rise in bad loan provisioning, has left PSU banks with huge losses. Ten of top 15 funds do not have PSU banks as part of their top 10 sector holdings. HSBC Mid Cap Equity, which had a 13.1 per cent exposure in 2013, has now significantly cut its position to just 0.7 per cent but L&T India Value Fund has retained a low exposure of 2.6 per cent.

Taking a contrarian stance, Reliance Vision increased its stake from 6.2 per cent to 10.5 per cent. Franklin India High Growth Companies Fund, too, has bumped up its stake from 0.8 per cent to 11.9 per cent. But these funds primarily hold SBI, one of the better placed among the PSU pack. A few funds do have holdings in Bank of Baroda and Punjab National Bank, but these stocks constitute a very minuscule portion of their portfolio.

With India ranked as the second fastest growing economy, most top performing funds are placing their bets on the India growth story. But with the consumption stocks, in general, becoming too expensive, fund managers appear to be turning once again to the cyclical theme. This is reflected in the increased holding of private banks and financials; these stocks constitute about one-fourth of most funds’ portfolio. Funds are also taking selective bets on recovery in infrastructure with engineering, construction and cement among the other top 10 sector holdings.

Defensives, too, have currently taken a back seat. While software and pharma also fall within the top 10 list, they are no longer at the top of the pecking order for most funds.

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