Informist, Wednesday, Jun 2, 2021

By Ajay Ramanathan

MUMBAI – In a replay of the investment preferences from a year ago, the lockdowns linked to the second wave of COVID-19 made investors make a beeline for the mutual funds' sectoral schemes that gave handsome returns. Most investors have taken a liking for funds focused on healthcare, information technology, and financial services this year too.

While the allocation played out well in 2020, experts sound a word of caution this time due to risks mainly emanating from concentration of funds and overestimation of potential returns.

"My biggest worry is for somebody who is coming into pharmaceuticals and technology today, and if these sectors on a relative basis drag as compared to some of the other sectors, investors would want to chase again," Kaustubh Belapurkar, the director – fund research, Morningstar Investment Adviser India Pvt Ltd said. 

"Then they will chase the next hot sector, which will always deliver the last part of returns. It is a vicious cycle, you are always running behind the cycle but never get it right."

In 2020-21 (Apr-Mar), the open-ended sectoral and thematic funds saw net inflows of over 98 bln rupees. In comparison, open-ended equity funds, as a whole, saw net outflows of nearly 260 bln rupees, according to data by the Association of Mutual Funds in India.

While AMFI does not give the break-up of inflows into sectoral funds, data from Morningstar Direct showed that technology funds saw net inflows of 20.99 bln rupees, healthcare funds 19.54 bln rupees, and financial services 745 mln rupees in 2020-21.

As the second wave of COVID-19 intensified right in the beginning of the new financial year, the trend seems to have transpired this time too, as per data for the months of April and May.

In April, sectoral and thematic funds saw net inflows of 17.05 bln rupees, of which net inflows into technology funds are estimated at 4.57 bln rupees, and in healthcare funds at 5.74 bln rupees. Net inflows into financial services funds are pegged at 2.61 bln rupees, as per data from Morningstar Direct.

Along with the defensive sector tag, companies in the healthcare sector have been on the radar of investors because of the expected surge in demand for healthcare and related services during the COVID-19 pandemic. 

In case of companies in the information technology sector, the acceleration in digitisation during virus-led disruptions contributed to the positive traction.

Financial services companies and banks, on other hand, were seen as natural beneficiaries of the economic recovery, boosted by measures taken by the Reserve Bank of India and the government to boost credit and contain loan defaults, particularly in the micro, small and medium enterprises segment. 

INVESTMENT RISKS

Even as sectoral funds may outperform their benchmarks in the short term, trends may revert in the long term, according to Kedar B., a fund manager at Composite Investments Pvt Ltd. 

As of Mar 31, the one-year average returns on technology funds were 109.56%, and on healthcare and financial services funds were 71.49%, and 68.58%, respectively, data from Morningstar Direct showed. 

Their benchmarks, S&P BSE Healthcare TRI and S&P BSE IT TRI have generated returns of around 55-57% and 90-95% in the past one year, according to data from valueresearchonline.com. 

But returns tapered amid the second wave with both technology funds and healthcare funds witnessing a fall. However, financial services funds saw an increase.

As of May 27, the one-year average returns on technology funds were at 102.09%, while that of healthcare funds were 58.39%, and financial services funds were 81.30%.

Although the valuations of technology stocks and healthcare stocks are still decent at current levels, the risk-reward is far different from a year ago, according to investment advisors. 

This is not discouraging investors as they expect the consistency of returns among technology funds and healthcare funds to continue for an extended period of time, investment advisors said.

The biggest peril of investing in sectoral funds is that retail money chases performance, but because it is difficult to time the entry and exit from a particular sector, investors often buy into a specific sector when it is delivering its last leg of returns, an industry expert said.

Sectoral funds tend to be especially volatile and risky because sectors fall in and out of favour depending on market cycles. While the breadth of the Indian market is quite large, sectoral funds in India are quite narrow because the scope of companies for investors to invest in is limited.

"Either you as an investor have the wherewithal to take some calls as to which of the sectors will potentially do well going ahead and if you cannot not do that, you just buy actively managed diversified equity funds, because managers will take that call for you," Belapurkar said. 

Diversified equity funds invest in companies regardless of size and sector and across market capitalisation to maximise gains and avoid concentration in a single sector. 

Apart from such schemes, managers also recommend looking at funds based on broader themes that capture global trends like environment, social and corporate governance, disruptive innovation, climate change, financial technology and consumption, among others.

Themes like environmental, social and corporate governance and disruptive innovation got a boost during the pandemic as investors took to companies that were seen as supporting the "social ecosystem" through their various employee and environmental policies. Companies that innovate in areas like gaming, social media, cloud computing also garnered interest as "work from home" became the norm, said Ashwin Patni, the head-products and alternatives, Axis Asset Management Co Ltd. 

Market participants peg these broader themes as less risky alternative to pure sector and thematic plays as they take exposure to various sectors under the umbrella of a specific theme or idea and, hence, can work well in the long term.

Global themes like disruptive innovation are suited to Indian investors as they allow fund managers the scope to allocate funds without diluting the investment mandate of the scheme. They also give investors the satisfaction of investing in high growth ideas--something which investors of Indian equities are used to, Patni said. 

Such trends on innovation and disruption are actively playing out in India on a daily basis, even though they are yet to feature in the listed space, he added.  End

Edited by Akul Nishant Akhoury

Informist, Wednesday, Jun 2, 2021

By Ajay Ramanathan

MUMBAI – In a replay of the investment preferences from a year ago, the lockdowns linked to the second wave of COVID-19 made investors make a beeline for the mutual funds' sectoral schemes that gave handsome returns. Most investors have taken a liking for funds focused on healthcare, information technology, and financial services this year too.

While the allocation played out well in 2020, experts sound a word of caution this time due to risks mainly emanating from concentration of funds and overestimation of potential returns.

"My biggest worry is for somebody who is coming into pharmaceuticals and technology today, and if these sectors on a relative basis drag as compared to some of the other sectors, investors would want to chase again," Kaustubh Belapurkar, the director – fund research, Morningstar Investment Adviser India Pvt Ltd said. 

"Then they will chase the next hot sector, which will always deliver the last part of returns. It is a vicious cycle, you are always running behind the cycle but never get it right."

In 2020-21 (Apr-Mar), the open-ended sectoral and thematic funds saw net inflows of over 98 bln rupees. In comparison, open-ended equity funds, as a whole, saw net outflows of nearly 260 bln rupees, according to data by the Association of Mutual Funds in India.

While AMFI does not give the break-up of inflows into sectoral funds, data from Morningstar Direct showed that technology funds saw net inflows of 20.99 bln rupees, healthcare funds 19.54 bln rupees, and financial services 745 mln rupees in 2020-21.

As the second wave of COVID-19 intensified right in the beginning of the new financial year, the trend seems to have transpired this time too, as per data for the months of April and May.

In April, sectoral and thematic funds saw net inflows of 17.05 bln rupees, of which net inflows into technology funds are estimated at 4.57 bln rupees, and in healthcare funds at 5.74 bln rupees. Net inflows into financial services funds are pegged at 2.61 bln rupees, as per data from Morningstar Direct.

Along with the defensive sector tag, companies in the healthcare sector have been on the radar of investors because of the expected surge in demand for healthcare and related services during the COVID-19 pandemic. 

In case of companies in the information technology sector, the acceleration in digitisation during virus-led disruptions contributed to the positive traction.

Financial services companies and banks, on other hand, were seen as natural beneficiaries of the economic recovery, boosted by measures taken by the Reserve Bank of India and the government to boost credit and contain loan defaults, particularly in the micro, small and medium enterprises segment. 

INVESTMENT RISKS

Even as sectoral funds may outperform their benchmarks in the short term, trends may revert in the long term, according to Kedar B., a fund manager at Composite Investments Pvt Ltd. 

As of Mar 31, the one-year average returns on technology funds were 109.56%, and on healthcare and financial services funds were 71.49%, and 68.58%, respectively, data from Morningstar Direct showed. 

Their benchmarks, S&P BSE Healthcare TRI and S&P BSE IT TRI have generated returns of around 55-57% and 90-95% in the past one year, according to data from valueresearchonline.com. 

But returns tapered amid the second wave with both technology funds and healthcare funds witnessing a fall. However, financial services funds saw an increase.

As of May 27, the one-year average returns on technology funds were at 102.09%, while that of healthcare funds were 58.39%, and financial services funds were 81.30%.

Although the valuations of technology stocks and healthcare stocks are still decent at current levels, the risk-reward is far different from a year ago, according to investment advisors. 

This is not discouraging investors as they expect the consistency of returns among technology funds and healthcare funds to continue for an extended period of time, investment advisors said.

The biggest peril of investing in sectoral funds is that retail money chases performance, but because it is difficult to time the entry and exit from a particular sector, investors often buy into a specific sector when it is delivering its last leg of returns, an industry expert said.

Sectoral funds tend to be especially volatile and risky because sectors fall in and out of favour depending on market cycles. While the breadth of the Indian market is quite large, sectoral funds in India are quite narrow because the scope of companies for investors to invest in is limited.

"Either you as an investor have the wherewithal to take some calls as to which of the sectors will potentially do well going ahead and if you cannot not do that, you just buy actively managed diversified equity funds, because managers will take that call for you," Belapurkar said. 

Diversified equity funds invest in companies regardless of size and sector and across market capitalisation to maximise gains and avoid concentration in a single sector. 

Apart from such schemes, managers also recommend looking at funds based on broader themes that capture global trends like environment, social and corporate governance, disruptive innovation, climate change, financial technology and consumption, among others.

Themes like environmental, social and corporate governance and disruptive innovation got a boost during the pandemic as investors took to companies that were seen as supporting the "social ecosystem" through their various employee and environmental policies. Companies that innovate in areas like gaming, social media, cloud computing also garnered interest as "work from home" became the norm, said Ashwin Patni, the head-products and alternatives, Axis Asset Management Co Ltd. 

Market participants peg these broader themes as less risky alternative to pure sector and thematic plays as they take exposure to various sectors under the umbrella of a specific theme or idea and, hence, can work well in the long term.

Global themes like disruptive innovation are suited to Indian investors as they allow fund managers the scope to allocate funds without diluting the investment mandate of the scheme. They also give investors the satisfaction of investing in high growth ideas--something which investors of Indian equities are used to, Patni said. 

Such trends on innovation and disruption are actively playing out in India on a daily basis, even though they are yet to feature in the listed space, he added.  End

Edited by Akul Nishant Akhoury