Counter-cyclical calls by funds

Many fund managers are betting on higher tourism flow and manufacturing in mid-cap space

Inflows to mutual funds have risen substantially. The Association of Mutual Funds in India (Amfi) data show that assets under management (AUM) rose from Rs 8.5 lakh crore at the end of December 2013 to Rs 15.6 lakh crore by the end of August 2016. Inflows in the current calendar year amount to almost Rs 7 lakh crore (January-August 2016). About 28 per cent of the AUM is in equity funds, with 45 per cent placed in income funds.

Analysis by Value Research indicates equity fund portfolio allocation hasn't varied much in terms of size for the past three years. A little over 40 per cent is in "giant" stocks, that is the top 50 companies in terms of market capitalisation. Another 20 per cent is in large-caps, with 30 per cent in mid-caps and the rest in small-caps.

India is an outlier compared to most stock markets in one key respect: Actively managed diversified equity (DE) mutual funds (MFs) regularly beat benchmarks in India. In most markets, DE funds underperform benchmarks. Perhaps 10 per cent of DE funds beat the benchmark in any year in the US, for instance.

In India, at least 40 per cent of DE funds outperform on a regular basis and over half of DEs have beaten the benchmark since 2014! This was especially useful for active fund investors in 2015-16, when index returns were negative but many DE funds managed positive returns.

This unusual pattern may be because Indian markets are imperfect, with asymmetric information flows. An edge may be available for funds with large research teams. It could also be because many small-cap and mid-cap stocks are lightly traded and a single big fund position can trigger a major price rise.

Financials have been the preferred sector through the past five quarters in terms of attracting the most MF investments. Other favoured sectors include automobiles and energy, and information technology has also seen plenty of investments. Metals, communications (meaning telecom stocks), and consumer durables have been the least favoured in terms of MF positions.

The popular stocks in the large- and giant-cap portfolios of most funds consist of the usual suspects. It is the mid-cap portfolio that gets interesting. The top 10 mid-cap holdings include stocks like Shriram City Union Finance, Max Financial, Atul, Carborundum Universal, Apollo Tyres, Reliance Capital, Sun TV, Indian Hotels, Info Edge and IPCA Laboratories.

Three non-banking financial companies (NBFCs) are no surprise, given the trend towards being overweight. Reliance Capital is only just in the mid-cap territory, and most people would consider it a large-cap. It also has more of a corporate profile than the other two NBFCs and it also controls a large MF in itself. Shriram City is highly retail facing, with a portfolio of auto loans, loans against gold, and small loans against gold. Max Financial is a life insurance play. It is the holding company for Max Life, which is to be merged with HDFC Life.

Apollo Tyres fits in with the trend towards auto exposure. IPCA Labs is part of the pharma exposure that most fund managers consider mandatory. Sun TV is one of the multiple media plays that have been on the radar in recent times. Indian Hotels is a counter-cyclical. Tourism hasn't done very well for a while and the company is running at losses at the moment. (High-end tourism is also considerably driven by business visitors). Info Edge is a technologically driven classifieds portal, which matches jobs, real estate offers and matrimonial candidates. It also holds a large portfolio of stakes in start-ups - the most high-profile is Zomato.

Atul and Carborundum are specialised engineering concerns. Atul has a portfolio of chemicals for industrial use. It sells to industries as diverse as paints, pharma, agriculture, polymers, housing and construction. Carborundum makes bonded and coated abrasives, industrial ceramics, super refractories and electrominerals. It also supplies equipment like electric and hydraulic stackers, hand pallet trucks, power tools, etc. These two businesses are likely to gain a lot from an uptick in manufacturing activity.

This list doesn't present a complete picture since we're ignoring the giant-caps and large-caps which every MF holds. But, the mid-cap exposures do give some indications of where fund managers are looking for returns. Apart from broad-spectrum financial exposure, some managers are obviously making counter-cyclical bets on higher tourist flows and more manufacturing.