Not for the small investor

The Sensex may have gained 43 per cent in 2006, but it is unlikely that the average investor will be in a mood to celebrate this week, as the year comes to an end. That is partly because retail investors did not buy and sell at the right times, unlike institutional players whose moves provoked wide swings on the market, and partly because the gains during the year have tended to be more stock-specific than in previous bull runs""so that mutual funds have not kept pace with the Sensex. Besides which, the rally of 2006 should be looked at as a two-part move""one between January and mid-May and the other from mid-July till the year-end. In the first phase, the entire spectrum of stocks appreciated. But since July, foreign institutional investors, the most active players, changed the nature of the game and chose the safe haven of large-cap companies.

Thus, as the universe of stocks increases from the 30 in the Sensex, the returns keep reducing. The 50-stock Nifty gained 36 per cent till December 22 and the BSE 500 gained 35 per cent. But the gains in the BSE Midcap and the BSE Small cap were much lower, at 27 and 13 per cent, respectively. Even in the Sensex, 10 stocks have ended up beating the index gains of 43 per cent.

If stock prices are any indication of what is happening in the economy, then it is clear that India is on a 'building' spree. Stocks in the cement, construction and real estate sectors, have beaten the Sensex returns at a broad level. Real estate prices have skyrocketed over 50 per cent across the country, so companies engaged in the real estate and construction businesses saw their stock prices reach stratospheric levels. The top gainers include Unitech, up a staggering 2,900 per cent, and Ansal Properties which gained 360 per cent. A lot of these companies are sitting on huge land banks, which are being valued at current astronomical price levels. So it is no surprise to see cement prices go up"" demand is strong and there is not enough supply. The top four cement companies""UltraTech, ACC, Grasim and Gujarat Ambuja""gained 70-140 per cent during the year. Many smaller companies gained more as some of them were turnaround candidates or the benefit of higher prices pushed up their earnings sharply.

In most other sectors, there was a large-cap and stock-specific bias. If Mahindra & Mahindra and Maruti beat the index, Tata Motors and Bajaj Auto did not. Even in the booming engineering sector, there were enough smaller companies that did not keep pace with large companies like Larsen & Toubro, BHEL, ABB and Siemens. In banking too, the markets were biased largely towards private sector players like Yes Bank, UTI Bank and ICICI Bank, with State Bank of Mysore, Bank of India and SBI being the public sector exceptions. The FMCG sector, which was doing rather well till May 2006, also went through a downward re-rating from investors because of the intense competition in the sector, and fears that large-format retailers would cause further margin pressure. In software too, Infosys managed to edges lightly ahead of the Sensex, while the other three""TCS, Wipro and Satyam""under-performed.

The fate of the retail investor is evident from the average equity mutual fund returns of 31.31 per cent, 12 percentage points lower than the Sensex. The reason: mutual funds are far more diversified than the market's preference for a few stocks. This is a sharp departure from the past: in the previous five years, the average mutual fund had beaten the Sensex by a huge margin. Thus, for the small investor, the best bet in 2006 would have been to stick to index funds, as fund industry pioneers like John Bogle recommend.