Mutual funds: Tweak that AMC managers require to generate alpha return

Asset Management Company (AMC) fund managers have long preferred banking and information technology firms. As a result, mutual fund plans’ post-Covid yields increased as a large number of IT and banking firms managed to produce alpha during the post-Covid surge. However, banking and IT equities are experiencing a sell-off ahead of the new year in 2022. In fact, top IT firms have forecasted a return of zero in 2022. Similarly, financial stocks have been unable to gain traction.

Investment experts and certain fund managers believe that the trend in the IT and banking sectors will continue in the short to medium term, and that AMC managers should focus on other sectors such as energy, infrastructure, capital goods, metals, and other commodities. These segments, they claim, are better positioned to outperform important benchmark indices. As a result, diversifying one’s portfolio by investing in sectoral equities may assist AMC managers in generating alpha.

Vinit Khandare, CEO & Founder, My Fund Bazaar India Private Limited, commented on mutual funds’ exposure to banking and IT stocks, saying, “Due to recent headwinds in the banking sector, this segment alone has returned 5.96 percent and 7.9 percent, respectively, compared to 14.14 percent and 13.35 percent for large-cap diversified equity funds. Furthermore, banking and finance segments have the greatest allocation of 25% on average among large-cap schemes as of March 31, 2022, implying that 83 percent of AMC managers are bullish on the banking sector.”

“Furthermore, stocks in the IT sector were one of the main benefactors of the COVID-19 spread containment lockdowns.” The process of digitization, technological adoption, and increased demand for technology-related services in numerous sectors of the economy helped these sectors thrive. “Over the last three and five years, the IT area has been the strongest performer, with returns of 30.79 percent and 28.30 percent, respectively,” a My Fund Bazaar India specialist stated.

“Fund managers are forced to coat tail benchmarks — possibly due to the pressures of showing daily NAVs to investors,” said Siddhartha Bhaiya, MD and Fund Manager of Aequitas Investment Consultancy, on why mutual funds or AMC managers need a course correction now and look beyond IT and banking segment stocks. He listed out significant headwinds for a few sectors which have a large representation on the benchmarks:

1] Financials: Due to rising yields affecting Treasury income and a major focus on retail for the past 5-6 years (where household inflation may put strain on ability to pay EMIs on time), the banks and financial sector’s stock values may be under pressure.

2] Consumption-oriented stocks are facing input pricing problems, resulting in narrowing margins. Because consumption-oriented equities have a relatively high P/E multiple, they are currently priced to perfection, and any unfavorable news could have a negative impact on valuations.

3] IT is experiencing enormous attrition (between 25 and 36%), resulting in massive rehiring and repricing of its staff. With COVID-induced WFH and limited travel finishing, we believe the IT sector, despite its strong growth, may face challenges.

According to Siddhartha Bhaiya of Aequitas Investment Consultancy, there are a few modifications that mutual fund managers could make in the short to medium term “Historically, AMC executives have shown little interest in sectors such as commodities, energy, capital goods, and so on. Despite the fact that these sectors’ equities are trading at all-time highs, they are likely to outperform important benchmark indices. Sugar, paper, energy, metal, and other categories where investment is likely to be substantially larger in the short to medium term than IT and banking stocks should be considered by AMC managers.”