Evaluation of sector wise investment allocation criteria of top

Infrastructure Themed Funds in India

An Independent Project Report submitted

by

Vikas Gour

in partial fulfillment of the requirement for the degree of PGPIM

AIIM

2013

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Acknowledgement

I wish to especially thank Dr. Amit Shrivastava and Dr. Pramod Yadav for

unwavering support and understanding during the many hours I dedicated to

achieving this milestone in my life and career.

I would also thank to AIIM alumnus Mr. Pranay Surakanti for his help for this

project.

Last but not the least; I am thankful to all my peers for thought provoking

discussions and valuable help.

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Index

1. Executive Summary

2. Introduction

3. Mutual Funds in India

4. Infrastructure Themed Funds

5. Rise of interest among investors in Infrastructure Themed Funds

6. Change in sector mix by Fund Houses

7. Objective

8. Research

9. Analysis

10. Conclusion

11. Bibliography

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1. Executive summary

Infrastructure themed mutual funds are directly affected with every up and down in the sector.

Infrastructure sector in India is largely dependent on government reforms, investment and

encouragement to private sector and therefore any policy paralysis effects results in stagnation

of projects for a long period.

Decisions taken by Fund Managers can make or break profits for the funds. What are the

reasons behind some funds making decent profits despite of sever slowdown in the sector

while other funds eroding value.

This report is an attempt to analyze sector wise weightage of investments made by the funds

which have performed outstandingly as well as funds which have disappointed hugely. This is

an effort to understand if it can be found out that there is a relation between the funds sector

mix and fund’s success or failure in earning positive returns.

2. Introduction

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

Mutual Fund Operation Flow Chart

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Organization of a Mutual Fund

ADVANTAGES OF MUTUAL FUNDS

Professional Management

Diversification

Convenient Administration

Return Potential

Low Costs

Liquidity

Transparency

Flexibility

Choice of schemes

Tax benefits

Well regulated

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TYPES OF MUTUAL FUND SCHEMES

A wide variety of Mutual Fund Schemes exist to cater to the needs such as financial position,

risk tolerance and return expectations etc. The table below gives an overview into the existing

types of schemes in the Industry.

3. Mutual funds in India

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank of India. The history of mutual funds in India can be broadly divided into four distinct phases.

First Phase – 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management.

Second Phase – 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).

By Structure

Open - Ended Schemes

Close - Ended Schemes

Interval Schemes

By Investment Objective

Growth Schemes

Income Schemes

Balanced Schemes

Money Market Schemes

Other Schemes

Tax Saving Schemes

Special Schemes

-Index Schemes

-Sector Specific Schemes

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SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.

At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

Third Phase – 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crores. The Unit Trust of India with Rs. 44, 541 crores of assets under management was way ahead of other mutual funds.

Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs. 29, 835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth.

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The graph indicates the growth of assets over the years.

Note: Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the

Unit Trust of India effective from February 2003. The Assets under management of the Specified

undertaking of the Unit Trust of India has therefore been excluded from the total assets of the

industry as a whole from February 2003 onwards.

4. Infrastructure Themed Funds

At fundamental level infrastructure theme will include capital goods & engineering companies.

However, similar to various government authority have different definition of infrastructure,

Mutual Fund Houses also have their own definition of what can be clubbed under the

infrastructure theme.

UTI Infrastructure was the first infrastructure themed fund in India launched in April 2004.

It was the best performing equity fund in 2006 with a 61.5 per cent return. Tata Infrastructure

and ICICI Prudential Infrastructure delivered 61.5 per cent and 60.3 per cent respectively. This

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was no mean feat considering that in 2005, no infrastructure fund featured in the top 10 return

generators.

5. Rise of interest among investors in Infrastructure themed funds

It was the government's planned infrastructure expenditure of $320 billion during the eleventh

5-year plan (2007-2012) that did the trick. Before the global financial crisis hit the markets in

2008, investors had been bitten by the infrastructure bug.

There was a flurry of new fund launches, which garnered a large amount of money. In February

2008 alone, 17 infrastructure funds had raised Rs 25,000 crore from the market. During the

early part of the 2008, most of these funds had clocked returns of 60-70% on an annual basis.

Since the fall of the market and its subsequent rise in 2009, investors have shunned

infrastructure funds due to the sharp decline in their valuations and subdued returns

thereafter.

As on march 2013, there are 51 infrastructure funds in India.

6. Changes in sector mix by fund houses

In infrastructure funds, segments that used to be multibagger themes in the pre-2008 period

are full of stocks that are from other sectors. Reason being that these funds started at a time

when the infrastructure theme was outperforming all others sectors and therefore a lot of

money was mobilized in these funds when they were launched. But when markets fell following

the global economic crisis, these themes were worst affected and despite the long term growth

story linked to these themes, they have not been able to bounce back. This has also pushed

these funds to include other sector stocks in their portfolio and help investors limit their losses.

Today, their investment universe is quite large and includes sectors like financials, industrials

(capital goods & engineering), utilities, energy, consumer cyclical (primarily auto), basic

materials (includes metals, cement, chemicals and building materials), real estate and

communication services (telecom). Infrastructure funds generally avoid sectors like healthcare,

technology and consumer defensive (FMCG). Furthermore, some of the Infrastructure theme

funds have their investments even in IT, Media & entertainment and Consumer Durables.

However, infrastructure funds do keep a higher weightage to certain sectors. Presently, these

funds have the highest allocation to industrials sector, where average allocation stands at

around 24% at the end of February 2013. A typical diversified equity fund maintains an

allocation of just 9.7% (on average) to the sector at the end of February 2013. Financial services

sector has the second highest allocation in portfolios of infrastructure funds, with an average

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allocation of 19.5% at the end of February 2013. Other sectors to which infrastructure funds

have high exposure are utilities, basic materials and energy. Refer to Table 1 for sector

allocation of infrastructure funds.

7. Objective

How do Funds Managers managing infrastructure themed funds decide on how much is to

invest in a particular sector? What could be the signs that those managers may be looking for

before investing? The objective of the research is to find any relationship between fund

allocated to sectors and the return generated by the funds.

8. Research

To find out above mentioned relationship, a comparison has been made between top 5

performers and worst 5 performers for a 3 months period (March-May 2013)

These are open ended equity (Growth) infrastructure funds.

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Returns of 5 best and 5 worst performers

5.20%

2.40%

-6.60%

-3.20%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

*Returns

GS Infra

JM Basic

LIC Infra

Pinebridge

Can Robeco

HSBC Progressive

Reliance Infra

DSP-BR Natural

Reliance Diver

Escorts Power

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Sector allocation of top 5 and worst 5 performers

Returns for 3 months period :- Mar-May 2013 (as on 21st May 2013)

Sector allocation as on 30th Apr 2013

Source: http://www.moneycontrol.com/mf/find_a_fund/findtopfund.php#result

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Comparison of sector allocation by best 5 and worst 5 performers

Now, observing the holding companies of these 10 funds shows that among best performing funds as

well as among worst performing funds, few companies are common. Refer below mentioned tables.

Top 10 holdings of Best 5 Funds

0

5

10

15

20

25

30

Best 5 Funds

Worst 5 Funds

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Top 10 holdings of Worst 5 Funds

Here, it can be observed that top ten holding of all best performing funds have few winning

players such as L&T, HDFC, Bharti Airtel, etc. Therefore, these winning holding companies’

performance has helped funds to earn outstanding returns even though the sector itself is

going through troubling time.

Holding companies of worst performing funds are mostly those companies who did not do well

even in case the sector was generating at least some minimum returns. Also, worst performing

funds have very low exposure in those companies which were high performers and which have

contributed to the success of best performing funds.

9. Analysis

On observation, we can see that the top performing infrastructure fund “GS Infra BeES” has

earned 5.20% of returns and has not invested in Banking & Finance at all but have invested in

Engineering & Capital Goods, Utilities and Telecom only. While, next two top performers have

invested significantly in Banking & Finance along with engineering companies earning decent

returns.

Similarly, while observing worst performing funds, it can be seen that although these funds also

have invested in Banking & Finance along with other industries, still they destroyed investment

value. Therefore, analyzing the industry wise weightage of the total investment portfolio of the

top performers and worst performers, it is not possible to link returns with the industries

invested into.

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10. Conclusion

The above analysis shows that just because the infrastructure sector’s growth is stalled, it

doesn’t mean that funds can not earn decent returns. There are always outstanding players in

every industry which can help funds earn decent returns.

The key is to spot best players in every industry which are growing in spite of slowdown in

industries. As a fund manager, I will look for best performers in a sector rather than overall

growth of the sector because best players are generally much better equipped for unexpected

systematic risks that affect the whole sector. Top 5 best performers have invested in

outstanding players of every sector such as L&T, PTC India and Power Grid, and that has helped

them to earn better returns than others.

Furthermore, if fund managers are good at forecasting promising companies future

performance by assessing their financials and market conditions, they are more likely to reap

benefits even if the overall sector growth is stalled.

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11.Bibliography

http://www.business-standard.com/article/pf/sector-funds-are-quite-diverse-113030300362_1.html

http://www.moneycontrol.com/mf/find_a_fund/findtopfund.php#result

http://www.amfiindia.com/

http://www.moneycontrol.com/mf/find_a_fund/findtopfund.php#result

http://businesstoday.intoday.in/story/infra-funds-growth-ahead/1/10531.html

http://www.morningstar.in/posts/17619/infrastructure-funds-a-sea-of-red.aspx