Funds find IPO waves too small to surf on

Deploy only 2.5% of their assets in companies listed since 2014

A dearth of big-sized initial public offerings in recent years has constrained domestic fund managers from riding the new IPO wave. Fund managers feel forced to chase the same set of stocks amid strong inflows into their schemes.

In the 52 newly listed companies since 2014, fund managers have a total investment of a mere Rs 13,270 crore, or 2.5 per cent of their assets under management (AUM) as on December 2016. The total equity AUM is Rs 5.1 lakh crore.  Of this, nearly Rs 10,000 crore is locked in 16 newly listed companies.

Some of these companies are Equitas Holdings, ICICI Prudential Life Insurance, and PNB Housing.

"Though many companies came to the IPO market, there were not many companies with big issuance size," says Mahesh Patil, co-chief investment officer (CIO), equities, at Birla Sun Life Mutual Fund. "Investments in new issuances are done depending on valuations and long-term perspective on the businesses. New issuances, of course, provide liquidity to the market and, given the inflows in mutual funds, representations on stock markets from under-represented sectors always help."

Among the new entrants, fund managers were seen favouring sectors like medical diagnostics, hospitals, aviation, and financials. "We have seen emergence of new sectors through listings over the past few years. It is nothing but a reflection of the changing composition of the economy. There are new choices to investors. Sectors and companies that were not available earlier are available now. We may see issuances from sectors like retail, education, e-commerce, insurance, and asset managers. That will add up to the existing universe of stocks," says Sunil Singhania, CIO, equity, at Reliance Mutual Fund. "Till we see more issuances, we would have to chase existing stocks. One must take into consideration that several large investors like private equity ones are also exiting; foreign investors too have been selling, so these provide additional fresh shares to invest in, even if there are not much activities in the IPO market," says Patil.

Kaustubh Belapurkar, director, fund research, Morningstar India, says, "Currently there are 300-350 stocks that are under active research by fund managers. This is relatively a small proportion, given the number of existing listed companies in India. Having said that, a universe of 350 stocks is fairly large to invest in and fund managers may not have to restrict their investments, given the few number of large listings."

A large chunk of mutual fund equity assets are concentrated in stocks like HDFC Bank, ICICI Bank, Infosys, Larsen and Toubro, Tata Motors, State Bank of India, Maruti Suzuki, Axis Bank, Sun Pharma, IndusInd Bank, and ITC. These top choices have remained largely unchanged over the past several years.