“Infrastructure sector will be a key contributor to our economic growth” – shouted the headline of some pink papers in the past and so did the anchors and experts of some business channels. And many of you in that sheer excitement created by the pink paper and business news channels, invested in the so called “promising infrastructure growth story” either through direct equity (i.e. stocks) or through infrastructure sector mutual funds.
While pink paper and business channels did their job by increasing the readership and viewership respectively, let’s evaluate whether have you taken a prudent investment decision by investing in the infra theme /sector mutual funds.
How infrastructure theme / sector funds fared vis-à-vis Diversified equity fund
(NAV data is as on December 6, 2010. Standard Deviation and Sharpe ratio is calculated over a 3-Yr period. Risk-free rate is assumed to be 6.37%)
(Source: ACE MF,PersonalFN Research)
The table above reveals that your faith in the infra theme / sector funds, has led you to a dreadful destination. When analysed from a 3-Yr time frame, all infrastructure funds have given negative returns on CAGR (Compounded Average Growth Rate) basis. To simply put the risk which you were exposed to (as revealed by the Standard Deviation), was not compensated well as revealed by the negative Sharpe Ratio. But on the other hand, all diversified equity funds irrespective of their market cap bias and style of investing which they follow; during the same time period of 3 – Yr delivered enticing positive returns on a CAGR basis, by well managing their risk. Moreover, infra funds have been unsuccessful even in beating the performance of the broader index – BSE Sensex.
| Schemes and Index |
BULL |
BEAR |
BULL |
17-Jan-06
to
09-Jan-08 |
17-Jan-06
to
09-Mar-09 |
09-Mar-09
to
06-Dec-10 |
| Diversified equity funds* |
46.56 |
-57.26 |
72.43 |
| Infrastructure sector funds* |
66.18 |
-61.44 |
61.44 |
| BSE Sensex |
50.36 |
-55.36 |
67.05 |
*Note: Average returns have been calculated
(Source: ACE MF,PersonalFN Research)
Even when analysed through a study of performance across market cycles, infra funds performed well during the bull phase prior to the emergence of U.S. sub-prime mortgage crisis. But, when the sub-prime crisis emerged in U.S., the shivers were felt in the Indian markets too where the bears started firming their grip and infra funds took a major beating (as compared to diversified equity funds). Moreover, post the recovery too (bull phase from March 9, 2009 till date) infra funds have been laggard when compared to diversified equity funds.
Now you may say – “I had invested in good and big mutual fund houses; then why such negative returns?”
Well, the answer is that when the U.S. sub-prime mortgage crisis emerged, the tremors of the same were also felt in the complete infra pack, and off course real estate markets too as fundamentals therein were at question. The realty pack (which also forms a part of the infra theme) was witnessing high interest costs and to worsen the story, inventory started piling as people refrained from availing housing loans as they turned conservative in their buying pattern, as we (India) had slipped into a recession as what the developed nations did.
Physical real estate market too had corrected by 30% - 40%, and stocks in the infra theme such as cements, metals, engineering, construction, banks and housing finance companies (which financed infra growth) tumbled down. The Indian equity market (BSE Sensex) had corrected downwards by 60.9% (before they rallied from March 9, 2009 onwards) and the Indian economy like the global economy displayed a gloomy picture.
Sector holdings
| Top 10 Sectors |
% of holding* |
| Engineering |
20.2 |
| Banks |
16.1 |
| Oil & Gas |
15.5 |
| Power |
10.3 |
| Telecom |
5.3 |
| Ferrous Metal |
5.0 |
| Finance |
4.7 |
| Consumer Durables |
4.0 |
| Construction |
3.1 |
| Transportation |
2.9 |
*Note: Sector holdings as on October 31, 2010 of infra funds in the peer comparison
table, have been taken for top-10 sector calculation.
(Source: ACE MF,PersonalFN Research)
Top 10 sectors (as seen in the table above) of infra funds constituted to be 87.1%, while the other ancillary sectors to the infra theme had a 12.9% share in the total portfolio of the infra funds.
Moreover now one may say – “We are in a growth trajectory, as revealed by strong GDP (Gross Domestic Product) numbers posted by our economy. Moreover, physical real estate prices have also risen and are in fact higher than those seen prior to the crash, engineering pack is doing well etc.”
Yes, sure! But the situation hasn’t changed for this sector / theme. Even the “Adarsh” scam along with housing finance company scam which exposed some big names such as LIC Housing Finance, Central Bank of India, Bank of India, Punjab National Bank and Money Matters Financial Services Ltd., is also affecting the real estate and banking sector which forms a part of the infra theme.
In fact the CNX Infra Index which reflects the fundamentals of the stocks trading in the index is still a laggard as compared to the broader index - BSE Sensex, when seen on a 5 – Yr time frame. So, if you had invested 
10,000 each in the respective indices on December 6, 2005, then same investment would have yielded you 22,666 in BSE Sensex, while in CNX Infra Index 17,942.
Base: 10,000
Data as on December 6, 2010
(Source: ACE MF,PersonalFN Research)
When seen from the peak, the CNX Infra Index (from its peak of 6,260.66 points on January 9, 2008) is still down by 45.3%, whereas the broader index – BSE Sensex (from its peak of 21,004.96 points on November 5, 2010) is down by mere 4.9%.
In a nutshell…
While your distributor might say - “Having infra funds is like adding salt and pepper to your portfolio”; we believe that you got to recognise that the same “salt and pepper” can be added to your portfolio through diversified equity funds, as they are free to invest in infra themes as well (when they look promising) and exit from them as the story fizzles out.
Moreover, since diversified equity funds truly undertake diversification strategy for you in its true senses (as they hold stocks from various sectors / themes); they provide you better safety as the specific exposure to a sector / theme is reduced. While investing in diversified equity funds, we opine that investors should have a long-term horizon and adopt the SIP (Systematic Investment Plan) route of investing as it would provide you the advantage of rupee-cost averaging along with compounding.
Add Comments
| Comments |
sandipsalokhe@hotmail.com
Jan 07, 2011
what should we do do we exit now or continue furter for how many yrs what isthe trend for next 2 yrs of this sector and likely return on investments.
dr sandip |
1