5 sectors to watch out for

Here are some sectoral funds that could benefit from the Budget. It must be noted that the case for such funds is never very strong. The idea of fund investment is that a fund manager should decide which sectors are in and which out. This Budget is short on sector-specific measures, except for infrastructure-related sectors

POWER

Increased allocation to power development marks the sector as a beneficiary

Reliance Diversified Power

The fund was conceived way back in 2004 in the hope of power sector reforms. Though the reforms never took place, the fund did not disappoint. For the past five years, the fund has had an annualized return of 46.31%, while in the recent bull run (9 March-30 June), it turned in a whopping 76.52% return.

As was the case with all other equity funds, 2008 has been a poor year for the fund, to say the least. It was down by -50.39%.

Also See Reliance Diversified Power (PDF)

As the name suggests, the fund has historically invested more in power sector-related companies such as Siemens; Crompton Greaves in production of power generation equipment; and Reliance Infrastructure, Areva T&D in power generation and distribution. But at times, the fund manager has expanded its focus to bet on non-power or infra-related stocks such as banking (ICICI Bank) in order to take advantage of the opportunities in infrastructure financing.

The fund manager maintains a focused portfolio for tracking the power theme. Its average portfolio size has been 18, though of late, with more companies in the sector getting listed, the portfolio size has also gone up (as of 31 May, the size was 27).

OIL AND NATURAL GAS

Enhanced and rationalized tax benefits for the oil and natural gas sector will benefit a large chunk of this fund’s portfolio

IDFC Imperial Equity

One of the top funds in the equity diversified space in 2008, it managed to pull through last year with just a 42% fall while the category and benchmark were down by 55% and 56%, respectively.

Though the fund managed to do well in tough times, it does not particularly shine during good times. It has been able to beat the category average in only one of the five quarters during which the category was yielding positive returns. This could be because of its distinct large-cap bias, which holds back its returns when the mid-caps start rallying. Currently, the fund is betting heavily on the oil and natural gas segment. Its last three-month average exposure to the oil and gas sector has been 24.09% of the total portfolio, while as of 31 May, exposure was further hiked to 26%. Among companies, currently Reliance Industries (7.01%), Gail (4.50%), ONGC (5.26%) and IOCL (4.08%) dominate the oil and natural gas portfolio of the fund.

Also See IDFC Imperial Equity (PDF)

Traditionally maintaining a compact portfolio of around 26 stocks, it has been on the conservative side. But with its bias towards one sector, the fund manager is looking to reverse its record in the bull market.

PHARMA

Custom duty reduction on key drugs will benefit the pharma sector

Franklin Pharma

The initiator of the pharma theme, the fund was launched in March 1999 to tap the sector’s potential. Since most such companies are mid- and small-cap in nature, the category has its share of volatility. But compared to its peers, this fund is a relatively stable offering. In 2008, it lost -27.59%, which, considering the condition of other equity funds, is regarded as impressive. The fund has in the recent rally gained over 49%, while its five-year annualized return is 14.62%.

Also See Franklin Pharma (PDF)

True to its calling, the fund’s major allocation in the healthcare sector, with stocks such as Ranbaxy, GlaxoSmithKline Pharmaceuticals, Cipla, Dr Reddy’s and Pfizer dominating its portfolio at one time or another. Currently its top five stocks account for 41% of the total portfolio, with Lupin alone accounting for over 10%.

Currently, the fund has a concentrated portfolio of 21 stocks (as of 31 May), which is very much in line with its historic average of 18 stocks.

INFRASTRUCTURE

A wide range of enabling actions for infrastructure development makes this the first choice for a sector that will benefit from this Budget

ICICI Pru Infrastructure

The highest alpha generator in the category, it was the best performer in 2007 and 2008, thanks to a combination of successful sector rotation strategies with optimal exposure to derivatives and the Nifty. In 2008, the fund made the right moves. It hiked its exposure to large caps, went heavy on debt and used derivatives liberally. But in the recent rally (9 March-30 June), it returned just 60.26% (category average: 81.82%). Not surprising when you see that its equity exposure dropped from 89% in March (including derivatives) to 57% in May.

This is typical of the fund manager’s style and investment philosophy, which is valuation-driven. The rally pushed most infrastructure stocks above fair value so fund manager Sankaren Naren cut his equity exposure. He will re-enter when he sees long-term growth visibility to justify the valuations. He actively changes the portfolio’s complexion with no qualms about going against the herd.

Also See ICICI Pru Infrastructure (PDF)

Though the portfolio looked bloated last year, this year it has averaged at around 40 stocks.

AUTO

UTI Transportation and Logistics

The fund was launched together with five other thematic funds under the UTI Thematic Funds umbrella in April 2004. Later, in April 2008, its name was changed from UTI Auto Sector Fund to its present offering. The past performance of the fund may not seem very impressive. But its exposure to the transport sector and the recent revival of the auto segment has brought it into the limelight. Its five-year annualized return is barely over 10%. In 2008, it was down under with a return of -48.77%. But in the recent bull rally (9 March-30 June), it turned the corner with a 57% return while its year-to-date return is more in line with the Sensex return (54.5% for the Sensex vs 52.21% for the fund).

Also See UTI Transportation and Logistics (PDF)

Also See What’s Costlier....and Cheaper (PDF)

The fund boasts a very focused portfolio, with the top 10 stocks accounting for 62% of its total investments. Its top holdings have mostly been concentrated among automobile manufacturers such as Mahindra and Mahindra, Tata Motors and Maruti Suzuki. Currently, Bajaj Auto (10.73%) and Hero Honda Motors (8.48%) dominate the fund portfolio.

The author is CEO of Value Research, a mutual fund research firm.