Fund managers raised defensive bets in 2015

Cut allocation to banks, IT; pharma and FMCG gain favour

Equity mutual fund managers churned their sector preference in 2015, increasing bets on defensive stocks and reducing them on the high-beta banking sector.

Pharmaceuticals and fast-moving consumer goods (FMCG), the so-called defensive bets,  were seen gaining favour. Banking shares saw a substantial cut in allocation by the end of year while cement stocks witnessed increased buying.

The move comes amid a correction in the markets in 2015 after a sharp rally in the previous year.

Automobiles was the only major sector that fund managers remained bullish on while maintaining their exposure at nearly 10 per cent of overall equity assets.

Allocation to banks, the most invested sector, saw a cut of nearly 200 basis points (a basis point is a hundredth of a percentage point). The overall exposure to banking shares slipped from a high of about 22 per cent to below 20 per cent. Several bank stocks, public as well as private, are trading at their 52-week lows.

Navneet Munot, chief investment officer (CIO) of SBI Mutual Fund, said, “Banking is in for a structural change. Never in history have we seen close to 23 banking licences issued in 45 days. We expect higher competitive intensity and forces of digitisation across the banking value chain to question the existing brick-and-mortar banking model.”

Munot is of the view that barring a few top names, public sector banks as a segment stand to be “the most affected purely on account of incumbency, primitive digital strategy and struggle to attract relevant talent”.

Pharmaceutical companies, which were in focus throughout 2015 for all the wrong reasons because of the US Food and Drug Administration (FDA), interestingly, saw an increase of 120 basis points in exposure. It was despite the fact that the majority of these stocks were richly valued. Fund managers  ended the year with over 8 per cent of allocation to such counters.

Ravi Gopalakrishnan, head of equities at Canara Robeco Mutual Fund, said, “The pharmaceutical sector continued to deliver superior performance in an environment where most sectors are struggling to deliver. Given the high visibility of earnings, most investors are willing to give a higher P/E multiple to the stocks. However, off late several companies in the sector have come under intense FDA scrutiny. This can have short to medium term implications on the earnings expectations of some of the companies.”

“Pharmaceutical stocks have been the beneficiaries of multiple positive drivers in terms of skills on process chemistry, scalable production efficiencies, and smart product strategies that explored foreign geographies for navigating the patent cliff. The story has two important overhangs:   Global currency volatility — almost 20 per cent business exposure is to these geographies now — and intensified regulatory hurdles from the FDA as almost 50 per cent of the export business comes from the US,” Munot added.

Automobile stocks remained among the top favourites of fund managers. Despite a rural slowdown, they chose not to make any substantial change in their exposure.

“The automobile sector is also witnessing a slowdown due to weak rural demand. Successive monsoon failure and modest increases in farm support prices have impacted demand. However, we are seeing a cyclical improvement in commercial vehicle demand. With the Seventh Pay Commission benefits accruing next year we are selectively bullish on the passenger vehicle segment and on the commercial vehicle segment and also on the auto-ancillary space,” said Gopalakrishnan.

The third most invested sector was information technology (IT). Here, fund managers have taken a cut of about 40 basis points but maintain a bullish view. According to them, IT as a whole will continue to do well.

Currently equity assets under management stand at around Rs 4 lakh crore, or nearly a third of overall mutual fund assets.