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


Mutual funds investment: Banking and IT stocks have always remained one of the favourite segments for Asset Management Company (AMC) fund managers. This led to higher yield by mutual fund plans post-Covid as good number of IT and banking stocks managed to generate alpha return in the post-Covid rally. But, ahead of new year 2022, banking and IT stocks are under sell-off stress. In fact leading IT companies have given zero return in 2022. Similarly, banking stocks are unable to catch momentum.

Investment experts and some fund managers are of the opinion that trend in IT and banking sector is expected to continue in short to medium term and hence AMC managers are required to look at some other segment like energy, infrastructure, capital goods, metal and other commodity sectors. They said that these segments are better placed to outperform key benchmark indices. So, diversifying portfolio by investing in these sectoral stocks may help AMC managers to generate alpha return.

Speaking on the mutual funds exposure in banking and IT stocks; Vinit Khandare, CEO & Founder, MyFundBazaar India Private Limited said, “With the banking segment having seen headwinds in the recent past, this segment alone has given 5.96 per cent & 7.9 per cent respectively compared to 14.14 per cent & 13.35 per cent gains posted by large-cap diversified equity funds. Moreover, among large-cap schemes; banking and financial segments has the largest allocation of 25 per cent on an average as on March 31, 2022 which goes to say that 83 per cent of the AMC managers are bullish on the banking sector.”

“Furthermore, stocks in the IT segment was one of the biggest beneficiaries of the lockdowns imposed to contain the spread of COVID-19. The process of digitisation, tech adoption and rising demand for the technology related services in various segments of the economy made these segments do well. The IT segment has been the best performer over last three and five years offering returns of 30.79 per cent and 28.30 per cent respectively,” MyFundBazaar India expert added.

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

1] Financials: Due to increasing yields impacting treasury income and heavy focus on retail for the past 5-6 years (where household inflation could put pressure on ability to pay EMIs on time), banking and financial sector could see some pressure on their stock prices.

2] Consumption oriented stocks are seeing input price challenges, which has made their margins shrink. With the relatively high P/E multiple accorded to consumption oriented stocks they are currently priced to perfection, any adverse news could possibly have a negative impact on valuations.

3] IT is seeing a massive attrition (between 25-36 per cent) rehiring is resulting in massive repricing of their teams . With COVID induced WFH and restricted travel finishing we believe the IT segment despite good growth could see contraction of margins.

On tweaks that mutual fund managers need to adopt for short to medium term; Siddhartha Bhaiya of Aequitas Investment Consultancy said, “History suggests that AMC mangers don’t look much at sectors like commodity, energy, capital goods, etc. However, these sectors are expected to outperform key benchmark indices even though these sector stocks are quoting at their life-time high. AMC mangers need to look at sugar, paper, energy, metal, etc. segments where investment for short to medium term is expected to come much higher than IT and banking stocks.”

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.



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