 "NBFCs lure depositors with higher returns")
It’s well known that a large number of Indian active diversified equity (DE) funds beat their index benchmarks consistently, year after year. It’s also well known that this is unique to India. In every other major economy, active funds underperform their benchmarks as a group.
Luck can play a role in outperformance. For example, assume that 10 per cent of active funds will beat their benchmark in a given year in a given market. So, if there are 1,000 such schemes, 100 of these will beat the market in a given year. Any fund has a 10 per cent shot at doing this. While this set of outperformers will be random in any year, some, say 10 funds, will be repeat outperformers through sheer luck. We might be tempted to attribute good portfolio management skills to such ‘repeaters’.
But, the outperformance in India is too widespread to be attributed to random luck. Schemes from several fund houses have consistently beaten their benchmarks for very long periods, lasting even a decade or longer. Some reasons for this have been suggested.
The most rational is that India is an imperfect market due to selective leakage of sensitive information. It is also an imperfect commercial environment since a business with stronger political connections can often beat its competitors to become a market leader. Hence, a fund house with good intelligence can generate higher returns than the passive index. Whatever the causes, it’s interesting to see how much domestic equity (DE) fund holdings diverge in weight from the benchmark indices. On a sector-by-sector basis, financials contribute 36 per cent by weight to the BSE Sensex with energy (14 per cent), information technology or IT (11 per cent), automobiles (10 per cent) and fast-moving consumer goods or FMCG (10 per cent) being among the other big sectors.
The weights for active DE funds tends to be quite different. At the moment, they are collectively underweight in all these major sectors. The weights would be approximately 24 per cent in financials, nine per cent in energy, six per cent in IT, 8.5 per cent in automobiles and seven per cent in FMCG. The funds are comparatively overweight in construction (nine per cent for diversified equity funds vs four per cent for index), health care (five per cent vs 3.5 per cent), chemicals (six per cent vs three per cent) and metals (4.5 per cent vs two per cent), according to data sourced from Value Research.
On July 31, DE funds increased their exposures to construction, metals and financials substantially and also increased their exposure to FMCG and automobiles.
The thrust into metals is in line with an uptrend in metal prices across global commodity exchanges. Indeed, metal stocks have given excellent returns and the April-June quarter saw better results from the sector. The increased exposure to construction is a bet on a badly beaten-down sector, which is expected to revive as government expenditure on projects increases and the government also eases processes for project clearance and tries to expedite pending works. Construction may be seeing a revival but it’s very early days.
The increased exposure to FMCG and automobiles is a gamble on a rebound in personal consumption. The drivers for optimism here could be a better monsoon that revives rural demand and the festive season when car and two-wheeler manufacturers will push their products out. But, both industries are grappling with the goods and services tax (GST) confusion.
In comparison to the index, the DE funds are relatively underweight on financials, both banks and non-banking financial companies (NBFCs). However, this is the single largest area of exposure by a long way with roughly a quarter of assets parked in such stocks.
Financials could be a make-or-break sector, and not just for funds. Bank non-performing assets are at alarming levels and still getting worse, although loans seem to be going sour at a relative slower pace now. If policy action doesn’t pull the banking sector around soon, the twin balance sheet problem could take the entire economy down.
The NBFCs market is dependent on home loans, specialised loans to the power sector and retail credit for consumers opting for vehicle finance, white goods purchases, etc. Again this is a play on a pickup in household consumption.
