MFs' allocation to FMCG at 43-month low

Cyclicals and industrials being preferred with change in investment outlook

Indian equity funds’ allocation to fast moving consumer goods (FMCG) is at nearly a four-year low. Once an over-owned sector amid economic uncertainty, it has slid in deployment of mutual funds’ (MFs’) equity assets.

Data from the Securities and Exchange Board of India show allocations to FMCG stocks have dipped to 6.1 per cent of equity assets, the lowest since September 2010.

The widespread anticipation among market experts about an economic turnaround after the Bharatiya Janata Party’s decisive poll victory has led money being shifted from defensives to cyclicals and industrials.

Nilesh Surana, head of equity at Mirae Asset MF, said: “It’s nothing but a sector rotation in anticipation of the fact that cyclicals will do better in the coming years. From a long-term perspective, there is no problem with FMCG as a sector.”

The trend has been there for over a year, with allocations down from eight per cent  of equity assets to seven per cent. However, negative macro factors did not let fund managers drastically cut exposure to FMCG companies. In recent times, however, the decline in allocation has been sharp. In four months, fund managers pruned employment in FMCG stocks by a little over a percentage point.

The rally in FMCG counters over recent years has been capped to a large extent. Exorbitant valuations have kept investors at bay for some time.

According to fund managers, at a time when growth is expected in other sectors which are available at low valuations, it makes sense to look beyond FMCG for the time being and take a strategic investment call.

Rupesh Patel, fund manager at Tata MF, said: “Of late, there has been pressure on volume growth of FMCG companies, on the back of high inflation and reduced discretionary spending.

Valuations are much higher than other segments of the markets. There is no problem in the structural growth story. As of now, people are reducing allocations just because there are other opportunities in the market and other sectors are also trading at much cheaper valuations.”

The rise in allocations to banks, automobiles and capital goods in recent months shows fund managers are churning portfolios to take advantage of an anticipated better governance in times to come. For instance, in banking stocks, the allocation of MFs’ equity assets rose to 20.1 per cent  In January against 16.6 per cent a year before.

Similarly, in automobiles (including ancillaries), equity allocation reached 8.4 per cent from 7.8 per cent. Industrial capital goods, neglected for long by a majority of investment experts, is also witnessing rising interest. The current allocations to capital goods stocks is 3.3 per cent, compared with 2.7 per cent in January.