Losing their edge: Infra funds seem to be out of focus and out of favour

This could well be the great Indian mutual fund conundrum: infrastructure funds vs diversified funds. An analysis of the portfolio of infrastructure funds shows that they mirror the portfolio or have the same basket of stocks as diversified equity schemes.

Healthcare, FMCG and IT are the few notable sectors missing from their portfolio. Then why have these funds not performed yet? Infrastructure funds were part of the huge buzz about the Indian economy back in 2005. Consumption and outsourcing were the other hot themes.

Of these, infrastructure caught the fancy of quite a few mutual funds. Many new funds were launched and the category alone reported assets under management of Rs 20,000 crore till the start of the global meltdown.

During 2006-07, these funds did spectacularly well and investors were barely able to contain their excitement. But during the downturn, these funds were hit badly. The recovery came, but the infrastructure category failed to gather any momentum. It has been three years since then and the infrastructure funds are yet to report positive returns.

These funds have, in fact, ended up eroding investor wealth. Funds which were launched with a narrow investment philosophy changed their portfolio composition. Fund managers decided to go underweight on core infra stocks and diversified their infrastructure fund portfolio to other sectors such as banking and finance, metals and telecom which were initially not part of the infrastructure segment. Their argument for the diversification: the sectors are enablers of capital formation in the economy.

For example, UTI Infrastructure initially did not have banking and finance in its portfolio. However, in 2009 when the economy rebounded, the fund added the financial sector to boost its returns. This fund now has an exposure of over 25% to banking and finance alone. Others fund houses resorted to changing the fund's benchmark to show outperformance. ICICI Prudential changed ICICI Infrastructure's benchmark from the Nifty to the CNX Infra.

Thanks to that switch, the fund which was underperforming its benchmark over the last three years has now started outperforming the new benchmark. Basically, infrastructure funds today are much like equity diversified funds, but without exposure to FMCG, healthcare and technology. Reliance Mutual Fund is the only fund house which has stuck to the core philosophy of the infra fund. It has an exposure of close to 40% in the engineering and construction sectors, one of the highest in the industry.

According to a few fund managers, the returns trajectory of infrastructure funds has been low mainly due to the absence of a few sectors such as FMCG, healthcare and technology. These sectors constitute only 30% of the Nifty or BSE 100, but generate more than 70% of returns in the index. Some funds such as the HDFC Infrastructure fund even with an exposure to such defensive stocks failed to outshine its diversified counterparts. So, does it still make sense to invest in infrastructure funds?

Although infrastructure stocks have a more attractive valuation than consumption stocks, growth in the infrastructure sector is expected to be slow. This is because of problems in project execution and completion, working capital funding for developers and rising interest rates. Considering the bottlenecks in the sector, the returns of infrathemed mutual funds are also not very encouraging.

Moreover, fund managers also believe that it will take at least two to three years before infrastructure funds start performing and generating positive returns. Also, if there is a rally in the infrastructure segment, equity diversified funds have the leeway to raise their exposure to some of these sectors as they did in the recent recovery period in defensive stocks.

There is not much to lose in diversified schemes as one can profit on the upside at a lower risk than investing in infrastructure funds which have a higher risk quotient in comparison to the returns offered. Those who are investing in infrastructure funds from a mere portfolio diversification perspective could try out gold ETFs and other thematic funds like value and contra schemes as their returns have been healthier than infra funds.

Source: http://economictimes.indiatimes.com/features/investors-guide/losing-their-edge-infra-funds-seem-to-be-out-of-focus-and-out-of-favour/articleshow/9507897.cms