You can’t judge a book by its cover and a mutual fund by its short-term performance.
Time and again, investors are lured by the short-term gains of mutual funds and the equity market in general. Fund houses capitalise on this and launch schemes or promote categories of schemes that have done well over the recent past. Over the past month and a half, fund houses have filed offer documents with the regulator to launch as many as 12 equity-oriented schemes including hybrid funds, themed funds, and sector funds.
It seems that history is repeating itself with mutual funds catching on to the infrastructure theme. Some may remember that between 2004 and 2007, when the infrastructure sector was booming, fund houses rushed to launch infrastructure funds. However, as history has it, the investment theme failed to play out.
The chart below is indicative of the rise and fall.
Infrastructure: A Once Booming Sector
Data as on May 31, 2017
(Source: ACE MF, PersonalFN Research)
As the market tanked post-2008 (in the aftermath of the U.S. sub-prime mortgage crisis), investors who had bought these funds witnessed losses. Many fund houses merged their infrastructure themed funds with other schemes, while others began diversifying their portfolio with stocks that were indirectly associated with the infrastructure sector.
The result was, even though the infrastructure indices looked down and out, most infrastructure funds delivered stellar returns over the past couple of years. The schemes outperformed the Nifty Infrastructure index by a wide margin.
But more importantly, look at the short-term 1-year returns. Certainly, the returns that are in excess of 30% are nowhere close to the 16% returns delivered by the Nifty Infrastructure Index. Over the past one year, most schemes outperformed the broader S&P BSE 100 by about 10-20 percentage points.
This short-term performance has influenced the 3-year and 5-year returns as well, leading to an improved performance over their respective benchmarks.
Performance Of Infrastructure Mutual Fund Schemes
Data as on June 13, 2017.
Returns are on a point-to-point basis, those depicted over 1-year are compounded annualised. Schemes sorted in descending order of three-year return.
(Source: ACE MF, PersonalFN Research)
How have these schemes delivered an outstanding performance, vis-à-vis the benchmarks specifically the Infrastructure indices? The key lies in their stock selection.
As can be seen in the last column of the above table, just five of the 20 infrastructure funds have an allocation of over 30% to stocks present on the infrastructure indices viz the Nifty Infrastructure Index and the S&P BSE Infrastructure Index. Most schemes maintain a wide definition for infrastructure stocks and may have even included stocks that are remotely related to the infrastructure sectors to maintain diversification. This ability to pick and choose stocks has led to a better performance over the indices.
Among the popular stocks picked by infrastructure funds, just six are among those present on the two infra indices.
Popular Stocks of Infrastructure Mutual Funds
| Stock |
Number of Schemes Present In |
Present On The Infra Indices |
| Larsen & Toubro Ltd. |
19 |
Yes |
| Power Grid Corporation Of India Ltd. |
12 |
Yes |
| Indian Oil Corporation Ltd. |
11 |
No |
| Bharat Electronics Ltd. |
11 |
No |
| ICICI Bank Ltd. |
11 |
No |
| PNC Infratech Ltd |
10 |
No |
| Container Corporation Of India Ltd. |
10 |
Yes |
| Sadbhav Engineering Ltd. |
9 |
Yes |
| Ultratech Cement Ltd. |
9 |
No |
| Indraprastha Gas Ltd. |
9 |
Yes |
| ITD Cementation India Ltd. |
9 |
No |
| State Bank Of India |
8 |
No |
| The Ramco Cements Ltd. |
8 |
No |
| Techno Electric & Engineering Company Ltd. |
8 |
No |
| Gujarat State Petronet Ltd. |
8 |
Yes |
Data as on May 31, 2017
(Source: ACE MF, PersonalFN Research)
So, infrastructure funds have done remarkably well in the recent past, thanks to their stock picking skills and not hugging the benchmark indices. Does this mean infrastructure funds should form a part of your portfolio?
The Macro Picture...
Over the past year, the Government has announced several initiatives to boost the infrastructure sector. In the in Union Budget 2016-17, a record allocation of Rs 2.21 lakh crore was made for several infrastructure projects.
The Ministry of Road Transport and Highways plans to build five more Greenfield expressways across the country, which are expected to reduce travel time and propel economic growth. It also plans to upgrade India's airport infrastructure over a six-year period, and plans to set up 50 new airports over the next three years.
Government spending, along with investments from REITs and InvITs, is expected to provide a fillip to the currently cash-starved infrastructure sector. According to a joint report of Assocham and Crisil, REITs and InvITs can help raise approximately Rs 50,000 crore in the near-term, given the interest of certain players in the infrastructure and real estate space.
The Reality...
The infrastructure sector is heavily leveraged, and issues around clearances, land acquisitions, etc. continue to remain interwoven, as the sector is prone to disputes and litigation. According to a report by Ernst & Young, the number of projects stalled in India increased to 893 in March 2016 as compared to 766 in March 2014. Companies in the EPC (Engineering Procurement Construction) sector face a myriad of issues following a slowdown in the domestic economy. Issues affecting projects right from the planning to the operation phase have made several of them unviable.
According to the E&Y report,
“The infrastructure sector contributes to 14.2% of the total advances of the Indian banking system; however, its share in restructured standard advances stood at 34.4%, of which the power sector accounted for 20.9% (the highest share within the infrastructure sector). Consequent to the continued financial stress, the overall credit growth has remained subdued”
Private sector investments have fallen short of what is required, as companies need to address their highly leveraged positions first. Even though construction companies have reported a growth in booking order and though the construction cycle has picked up due to the government spending, private investment in infrastructure remains stunted.
The operating environment of India's construction industry remains immensely challenging, with major infrastructure projects commonly incurring delays and cost overruns. Even globally, infrastructure projects come with challenges and risk. However, India’s legal system and tax regime, along with the poor corporate governance of certain companies add to these challenges.
The Verdict...
Infrastructure funds (and other sector-oriented / thematic funds) expose investors to concentrated risk, as the fortune of the fund is linked to the undercurrents of the sector. Though many may remain optimistic about the sector, several factors are at play that determines the pace of infrastructural development in the country.
Over the past decade or so, infrastructure funds have not done any better than equity diversified schemes or even
opportunities funds where the fund manager is on the constant lookout for sectors that can benefit from changes in the micro and/or macro environment. It is evident from the performance tables below that infrastructure funds fall short of their more diversified peers.
Category-wise Performance - Point-to-point Returns
| Mutual Fund Category |
1-year Return (%) |
3-year Return (%) |
5-year Return (%) |
| Infrastructure Funds |
30.84 |
13.44 |
16.58 |
| Opportunities Funds |
25.16 |
15.50 |
19.44 |
| Equity Diversified Funds |
26.84 |
16.40 |
19.92 |
| Category: Benchmark |
|
|
|
| S&P BSE 200 |
22.11 |
10.79 |
15.07 |
Data as on June 13, 2017.
Returns are on a point-to-point basis, those depicted over 1-year are compounded annualised.
(Source: ACE MF, PersonalFN Research)
Over the 1-year period, infrastructure funds have benefitted from the positive sentiments revolving around the sector. They have outperformed opportunities funds and equity diversified funds by a clear margin. However, over the longer timeframes of 3-years and 5-years, the returns have fallen short the more diversified scheme categories.
Category-wise Performance - Performance Across Market Cycles
| Mutual Fund Category |
08/Jan/08
To
09/Mar/09 |
09/Mar/09
To
05/Nov/10 |
05/Nov/10
To
20/Dec/11 |
20/Dec/11
To
03/Mar/15 |
03/Mar/15
To
25/Feb/16 |
25/Feb/16
To
14/Jun/17 |
| Infrastructure Funds |
-59.70 |
71.98 |
-35.55 |
25.69 |
-24.70 |
40.22 |
| Opportunities Funds |
-57.02 |
87.07 |
-24.03 |
29.99 |
-20.54 |
35.83 |
| Equity Diversified Funds |
-57.17 |
86.44 |
-26.26 |
30.41 |
-18.53 |
36.13 |
| Category: Benchmark |
|
|
|
|
|
|
| S&P BSE 200 |
-58.97 |
84.37 |
-28.55 |
24.96 |
-21.08 |
31.21 |
Data as on June 13, 2017.
Returns are on a point-to-point basis, those depicted over 1-year are compounded annualised.
(Source: ACE MF, PersonalFN Research)
In the bear markets, infrastructure funds were unable to curb the downside risk. Apart from the recent bull market, the sector funds barely outperformed the benchmark in the bull market.
Although the returns clocked over the past year are quite wanting, there is a higher risk with infrastructure schemes compared to diversified equity funds or even opportunities funds. PersonalFN believes it is best to avoid sector and thematic funds, unless you want to take greater risk while your core mutual fund portfolio is well in place.
To capture investment opportunities across market capitalisations and sectors, opportunities oriented mutual funds can be worthwhile; because the fund manager holds a flexible investment mandate to do so. While you select a fund, choose one that has a proven track-record of generating consistent returns across diverse periods and market cycles. Further, ensure the fund house follows robust investment processes and systems.
PersonalFN’s FundSelect service helps you zero-in on the top-performing funds across varying market caps and investment style. Be it large cap, midcap, multi cap, value-based, opportunities-styled or balanced funds, along with our top recommendations we highlight the underperforming or average performing ones too.
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