Fund managers take refuge in defensive sectors

Choose to limit ambit of operations in view of sharp decline in equity markets.

Indian fund managers are again chasing defensives, to put a cap on mounting wealth erosion. No more playing with all sectors has become the principle for struggling asset managers, amid the sharp decline in equity markets.

Since August, they were tempted to spread investments across the board, as cheap valuations could not be resisted and reduced exposure to defensives. But cracking markets kept eroding the value of their investments and managers had no option but to shift their strategy.
 

BACK TO THE BASICS Rreturns by indices compared with benchmark Sensex
Indices	30-Aug	19-Dec	Change (%)
Health care	5,962.26	5,822.22	-2.35
FMCG	3,962.23	3,985.54	0.58
IT	5,061.83	5,657.79	11.77
Sensex	16,676.75	15,379.34	-7.78
All figures are at close of market session Source : Bombay Stock Exchange

Defensives, including fast moving consumer goods (FMCG), pharmaceuticals and even software have become the safest haven for asset managers, at a time when movement in the stock markets are becoming a problem to predict. For instance, in November, exposure to these sectors was scaled up between 40 and 70 basis points (100 bps make one per cent)).

“We are back to defensives,” says the chief investment officer of a foreign fund house. “In such a pathetic market, any mistake is irreparable. It’s better to stick with cash-rich companies, rather than making investments in hihgly-leveraged counters.”

Fund managers say that in the current month, more equity assets would be deployed in defensives. “Banks are a clear No. We and industry as a whole are taking a sell call on banking and probably those funds will find their way into defensives,” adds an equity head of a mid-sized domestic fund house.

Interestingly, a few months earlier, these fund managers had told Business Standard that in a falling market, one should not be defensive and ought to diversify in other sectors, too.

Since August-end, the benchmark stock indices have lost close to eight per cent, while the information technology index has gained 12 per cent.

Indices of health care firms far less at 2.35 per cent and FMCG moved up marginally by 0.6 per cent, bringing relief to fund managers.

They say a combination of domestic and global factors are not letting equities perform.

“The government’s inactivity, with failure on all fronts, coupled with no certainty emerging in Europe, are not giving confidence to investors. Buying interest has completely evaporated,” says the equity head of a foreign fund house.

“Forget indices,” he adds, “How can one make money when counters are cracking to the extent of their circuit on a daily basis? This carnage is eroding investments and defensive stocks are at least providing us a refuge.”