Fund managers find it risky to 'sell' defensives

A choppy and volatile stock market is not letting fund managers take a risk by reducing allocations to defensive stocks.

Top investment executives of the mutual fund industry have been maintaining that with the tempting low valuations, there is no need to go for defensives, as there is an abundance of stock-picking opportunities.

However, in reality, defensives continue to be among their top picks, as they find shelter in fast moving consumer goods (FMCG) and pharmaceutical companies in the prevailing tough time. This clearly explains how investment managers are struggling to preserve capital at a time when they are finding it increasingly difficult to make money for investors.
 

GAIN SOME, LOSE SOME Returns from indices so far in FY13
Indices	30-Mar	26-Jun	Change (%)
Sensex	17,404.20	16,906.58	-2.86
Bankex	11,751.18	11,502.43	-2.12
FMCG	4,493.10	4,825.39	7.39
IT	6,081.87	5,622.53	-7.56
Source : Bombay Stock Exchange

According to statistics available with the Securities and Exchange Board of India (Sebi), investment allocation to FMCG stocks remained more or less unchanged in May, compared to April.

Further, exposure to the pharma sector increased 38 basis points (one basis point is one hundredth of a percentage point) to 8.26 per cent, from 7.88 per cent in April. 

“Stock markets have not given any indication of a runaway rally. Amid such volatility, fund managers are forced not to cut exposure to defensives in their portfolios,” says Sadanand Shetty, vice-president & senior fund manager (equity) at Taurus Mutual Fund.

Shares of FMCG majors such as Marico, Hindustan Unilever, ITC and Godrej Consumer have managed to remain largely unhurt amid the volatile market conditions.

Apart from defensives, the information technology (IT) sector is another top holding in the portfolios of fund managers. In May, the sector saw allocation surge by 61 basis points, signifying aggressive calls were being taken due to the sharp currency depreciation. “Another reason for the increasing exposure to IT is the outperformance by mid-cap companies. Even the sector’s large-caps continue to tempt,” notes the chief investment officer of a mid-sized fund house. Amid all this, banking, an all-time favourite sector, has remained top priority, with close to one-fifth of the equity assets being invested in banking shares.

There is an overall belief that despite short-term problems in the sector, the counter will lead the next bull run, adds Taurus’ Shetty. “It’s more like a beta play. There is an abundance of choices in the banking space,” says the CIO quoted earlier. Industrial capital goods have again failed to catch the attention of wealth managers, with allocation to the sector, which has long been shrinking, reducing to a mere 3.06 per cent.