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Business and economic cycles offer numerous investment opportunities. Investing in companies during their expansionary phase can lead to significant wealth creation. Recently, the new fund offer (NFO) of Sundaram Business Cycle Fund opened for subscription. Twelve schemes based on this theme currently manage assets worth Rs 25,775.8 crore.
“Sundaram Business Cycle Fund aims to generate alpha by picking the beneficiaries of structural changes in the economy driven by certain themes,” says Sunil Subramaniam, managing director, Sundaram Mutual Fund.
What business cycle funds offer
Business cycles have four phases: expansion, peak, contraction, and trough. Within a sector, companies can be in different phases of the business cycle. Those in the expansion phase or those emerging from a slump and having reasonable valuations can be good investments.
“Business cycles refer to economy-wide fluctuations in production, trade, and general economic activity. They typically alternate between expansion and contraction, and the sequence of these events is recurrent,” says Harish Krishnan, co-chief investment officer and head of equity, Aditya Birla Sun Life Asset Management Company (AMC).
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Business cycle funds invest in themes expected to do well over the medium to long term, such as digital businesses, premiumisation of consumption, and urbanisation.
They operate on the premise of identifying the current phase of the economic cycle and adjusting portfolios accordingly. “During the expansion phase, they focus on cyclical sectors like financials, consumer spending, and industrial sectors, while contractions prompt a shift towards defensive sectors like healthcare and technology. This dynamic strategy allows fund managers to seize opportunities and mitigate risks associated with changing economic conditions,” says Chintan Haria, principal-investment strategy, ICICI Prudential AMC.
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Promise of higher returns
These schemes invest in companies of all sizes and are actively managed. They are sector agnostic.
“These funds have well-diversified portfolios and a flexible approach. This helps in capitalising on opportunities and managing risks across market caps, themes, and sectors during different stages of the business cycle. Therefore, it is likely that investors will achieve superior risk-adjusted returns over the long term,” says Haria.
High-risk bets
These are thematic schemes focused on certain sectors. If the investment thesis goes wrong or the business cycle takes longer than expected to play out, they could underperform.
“Business cycle funds tend to take active bets on certain sectors and may have higher allocation to midcaps and smallcaps. Due to higher concentration in select sectors, there may be higher volatility compared to, say, a pure largecap or a flexicap fund,” says Krishnan.
“In the short run, these funds could underperform their benchmarks since their value creation potential may not become apparent to the broader market until the later stages,” says Subramaniam.
Barring HSBC Business Cycles Fund, the other schemes have a limited track record.
For experienced investors
These funds are meant for seasoned investors willing to take extra risk and having a horizon of at least five years. Invest in them using systematic investment plans and systematic transfer plans.
Restrict exposure to these thematic offerings to 5-10 per cent of the portfolio.
