Dear friends, I\\`m posting below an interesting article taken from The Hindu Business Line of 20th July 2008. so here it goes.
Investors who took exposure to any of the infrastructure theme funds and held on from January 2006 to December 2007, would have made returns of anywhere between 50 per cent and 122 per cent in this period.
But those who had failed to cash in on this windfall may have reason to regret it now. The two-year compounded annual returns of these sector funds now stand at an average of 17 per cent; all the paper profits vanishing into thin air in the fall of 2008. Infrastructure funds have, on an average, declined 46 per cent year-to-date, higher than the declines seen in most diversified funds. While it may not be surprising for a sector fund to take deep cuts during a downturn, most of the infrastructure funds in India have a more diversified portfolio.
The sharp decline despite the diversification makes a strong case for investors to regularly book profits on their theme funds, no matter how secular and broad-based the theme appears. We review the performance of about 15 infrastructure funds. The results support our view that theme funds should not form a large proportion of one’s portfolio.
Performance: Most infrastructure funds lost considerable value over the last year, eroding 23 per cent, on an average. The only fund with a positive return is Reliance Diversified Power, largely because of the earlier gains. The key reason for the steep decline appears to be the heavy tilt towards engineering and capital goods stocks in many such funds.
Most infrastructure funds have, therefore, fallen as much as the BSE Capital Goods index. For relatively diversified funds such as DSPML T.I.G.E.R, heavy exposure to banks and financial services contributed to the steep decline. However, diversification has worked well for a few others.
While higher exposure to metals, a sector driven by the commodity rally has come to the aid of infrastructure funds from Tata, Sahara and ICICI Pru Mutual Funds, Sundaram Capex took shelter in the more resilient IT space.
A comparison
Many infrastructure funds hold varied sectors and most diversified funds too have exposure to sectors such as energy, metals and capital goods. So, the performance of such theme funds was compared to diversified equity funds.
Interestingly, the last two years’ performance record (which includes the boom phase in infrastructure stocks) suggests that at least 10 diversified equity funds beat most of the infrastructure funds. For instance, only one infrastructure fund, Reliance Diversified Power (41 per cent CAGR) has outperformed IDFC Premier Equity, the top fund on the two-year chart.
Similarly, funds such as Reliance Regular Savings Equity and DBS Chola Opportunities scored higher than most infrastructure funds. These funds also declined less than infrastructure funds over the last year. As most infrastructure funds are less than three years old, this pattern could not be tested for a longer period.
However, the two-year trend suggests that that there are enough diversified funds that outdid the average returns from infrastructure funds. Wrong selection of funds within the theme or heavy exposure to infrastructure funds may, therefore, have dragged down an investor’s portfolio, as against holding a good basket of diversified funds.
So, which funds outperformed the market within the infrastructure theme over a 2-3 year period? Reliance Diversified Power and ICICI Pru Infrastructure are the clear winners.
Timing mattered
These are also the funds that compensated investors sufficiently for the risks taken. They remain our top picks.
Tata Infrastructure, Sundaram Capex and DSPML T.I.G.E.R follow in the next rung. The present portfolio of these funds, with value picks in banking and IT, may turn the tide for them, in the event of a recovery.
Notably, all these funds were the earliest to launch the theme and capitalise on the engineering and construction rally. Only these have been able to hold on to gains, to deliver a reasonable three-year return to investors. |
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