In 2004, UTI Mutual Fund was the first fund to enter the infrastructure sector with a thematic fund. Thereafter, this theme has attracted so much interest that almost all the fund houses have tagged along and launched their own funds.
The year 2007, was the peak for this category. The infrastructure funds had their best returns two years back. But it was too good to be true. The very next year their sky-high returns came down drastically.
With most projects either getting cancelled or delayed, the infrastructure stocks were the prime targets of bears last year. Obviously, the infrastructure funds too got affected and had one their worst years in their short history of existence.
While the theme appears to have succumbed to the economic slow down, the funds are trying out their hands by investing in unrelated sectors like financial services, FMCG and technology. By stretching the definition of infrastructure to include any economic activity under the sun the infrastructure funds are behaving more like a pure diversified fund than a hardcore thematic fund.
With the government promising to pump in more money into sector, this theme does not look as dull as the returns of these funds suggest. And to capitalise on the coming surge they need to be true to their mandate and not go off-track.
We analyse three prominent infrastructure funds:
ICICI Prudential Infrastructure – Smart allocations
This fund has probably turned others green with envy. The fund has stood tall amongst other infra funds, delivering not only the highest returns over the last bull phase, but also falling the least when the markets tanked.
There are times when the fund manager has gone against the herd. Whenever he sees opportunities, or the lack of it, he does not hesitate in altering allocations. Even stocks that have been in the portfolio for a long period are not consistently held. It’s not uncommon to find the manager to exit, only to re-enter later. The number of stocks has recently averaged at around 40, which has gone up to 53 and even dropped to 33 in the past. Moreover, the fund manager does not get too concentrated in his holdings. Exposures to single stocks have rarely crossed seven per cent. There have been a number of instances where the fund has made use of arbitrage opportunities.
An interesting trait of this fund is that it’s quite common to find a significant debt exposure, rather than cash.
The fund has proved its mettle in its relatively short history and is a strong contender in the infrastructure space.
Tata Infrastructure – Risk averse
The word ‘diverse’ describes this fund best. In spite of a large-cap tilt, the number of stocks has never gone below 50. The top three stocks in its December 2008 portfolio had an allocation of more than five per cent. And in the face of turbulence, the fund manager isn’t averse to moving into cash, as he did when the cash allocation touched a high of 27 per cent in May 2008. From June 2008, he also began to take an exposure to derivatives.
The fund manager is aggressive in his sector calls, rapidly moving in and out and willing to bet heavily. The fund truly impressed in 2006. In 2007, it stood out amongst the other diversified equity funds but was an average performer when compared with its infrastructure peers. In 2008, its fall was in line with the diversified equity funds category average.
All in all, this thematic fund stands out for its overall performance and lower risk.
UTI Infrastructure – Capable of delivering
This initiator of the theme had a perfect start in 2005, beatings its only peer, DSP BlackRock TIGER. And in 2006, it was the best in its category of six and the best diversified fund too.
Later in 2007, the fund saw a number of changes in its portfolio. It began became more conservative and increased its large-caps exposure. The fund increased its allocation to telecom but decreased its exposure to construction stocks, the latter of which had contributed to its performance in 2006. These moves impacted its performance in 2007. Though, a 72 per cent return is impressive, it was the worst performer in its category.
But when the market began to fall in 2008, the fund regained its glory. Aggressive cash calls, sometimes touching almost 29 per cent, along with an exposure to debt helped.
The manager tends to play it safe with individual stock holdings but should the need arise, he will not hesitate in taking concentrated bets, in the form of either cash or sector allocations.
Despite a setback last year, relatively speaking, this fund is capable of delivering.
