Funds in disguise

FUNDASTANDING

If you think infrastructure means roads, ports, airports, power etc, well, think again and think beyond that. For fund managers, it means much more than all this.

Of late, sectors such as telecom, banking and hotels are touted as infrastructure plays. The recently launched Sahara Infrastructure Fund "� dedicated to investments in the infrastructure sector, as the name suggests "� has even included healthcare in its portfolio.

So, for fund managers, the meaning of infrastructure transcends the barriers of the conventional definition; sectors, which should not, form a part of infrastructure funds.

Not that fund managers do not know what infrastructure actually means; in reality, it is a catch-22 situation for them, with infrastructure stocks having run up far too during the current bull run.

Over the past couple of years, construction companies "� Larsen and Toubro (up 331.36 per cent), IVRCL (up 633.66 per cent) and Gammon (up 507.72 per cent) have skyrocketed.

Similarly, as the power hungry country is upping its generation capacity, power equipment providers have gained enormously "� for instance, BHEL (up 278.43 per cent), Siemens (up 478.71 per cent) and ABB (up 290.72 per cent).

Cement companies like Grasim (up 93.19 per cent), ACC (up 241.68 per cent) and Gujarat Ambuja (up 162.81 per cent) have beaten the Sensex.

As expectations are running high indeed, and the markets are already counting two years of earnings into the bag, stocks sure look a lot more vulnerable, to the extent of giving disappointments. So, in a way, fund managers are only trying to mitigate risk by not putting all eggs in the same basket.

That should explain why fund managers have a more or less all-encompassing definition for infrastructure, which includes sectors that are directly and indirectly related to development.

Pru ICICI Infrastructure Fund has excluded only IT, Pharma and FMCG from its infrastructure fold and has included non-infrastructure sectors such as banks, hotels, oil and telecom.

"Being an infrastructure fund, one cannot exit from infrastructure stocks if these stocks go out of favour suddenly. But if the fund is fairly diversified, it can deliver better returns even during such times," reasons S Naren, fund manager, Prudential ICICI AMC.

"Our infrastructure fund was around 80 per cent greater than any other fund when it was launched in last six months and it became a large-cap fund. It has posted returns of around 40 per cent since its launch, which is pretty good," he adds.

In case of capital goods companies, the biggest risk is whether they would be able to execute orders on time.

Also a large part of the capital spending, for instance in irrigation and power, is done by the government; so the companies may be susceptible to delays. So, minimising risks is one more justification that fund managers put forward for diversifying.

N K Garg, chief investment officer, Sahara MF, says, "If we focus only on the conventional infrastructure, the risk will be high. By stretching the definition of infrastructure, the quality of returns actually improves."

Thus, the moot question is when fund managers are not confining themselves to infrastructure stocks, should you confine yourself to infrastructure funds?

Probably, you are better off trusting your money with plain vanilla diversified funds with a track record rather than going in for a so-called infrastructure fund that may change colour every now and then depending on the market mood.

Take the case of Tata Mutual. Tata Infrastructure Fund has invested in sectors similar to Tata Select Equity Fund. Both the funds have invested in sectors like engineering & industrial machinery, electronics, power generation & transmission equipment, electricals & electronic equipment, diversified, steel, oil & gas, petroleum & refinery and telecom. 
 

TATA SELECT EQUITY FUND (Allocation as on 28 Feb 2006)
Sectors	Percentage
Diversified	11.55
Electricals	11.16
Auto & Auto ancilliaries	9.75
Oil & Gas	8.44
Power Gen, Transmission & Equip	8.02
Electronics	7.64
Engg & Industrial Machinery	6.53
Telecom	4.89
Chemicals	4.75
Steel	4.60

Apart from the difference in weightages, the only difference is that Tata Select Equity Fund has invested in automobiles and chemicals, while Tata Infrastructure Fund has invested in housing & construction and cement. Also, the returns that the two funds have delivered are almost the same. 
 

TATA INFRASTRUCTURE FUND (Allocation as on 28 Feb 2006)
Sectors	Percentage
Diversified	15.49
Housing & Construction	14.06
Cement	11.60
Electricals	11.50
Power Gen, Transmission & Equip	9.97
Electronics	9.04
Engg & Industrial Machinery	7.48
Oil & Gas	4.85
Steel	3.87
Telecom	2.98

Now consider another fund from the same fund house, Tata Pure Equity Fund, which is fairly diversified into sectors like computer software & education, auto & auto ancillary, electrical & electronic equipment, cement, electronics, tobacco & pan masala, banks, oil & gas petroleum and refinery, and hotels & resorts. With a fairly well diversified portfolio, the fund has delivered good returns. Over the past one year, the fund has given returns of about 70 per cent.

Similarly compare Canbank Infrastructure Fund and Canequity Diversified Fund, reveals that the infrastructure fund has given returns of about 23 per cent while the diversified fund has given returns of about 26 per cent in the last three months.

The idea of investing in sector funds is to take the full advantage of the rally in the sector by taking focussed approach. Sector funds are meant to be high-risk-high-return funds. 
 

DIFFERENT STROKES? (Returns as on 14 march 2006)
	Tata Infrastructure Fund (Dividend)	Tata Select Equity  Fund (Dividend)
14 days	14.24	14.55
1 month	14.00	13.56
3 month	32..52	32.49
1 year	81.43	75.97

By diluting the flavour of the fund, fund managers are surely trying to cut risk but at the same time limiting the potential upside too. Since fund manager do not seem to be strictly investing in infrastructure stocks, it is probably better to invest directly in infrastructure stocks if you are looking for high powered returns.

But just a few stocks that too concentrated in one particular sector can't form the core of your portfolio. Diversified funds give you exposure to infrastructure and more and they are less risky too. Thus diversified funds with proven track record may be better bets than fickle sector funds.