2014 review: MFs went big on cyclical stocks

Thanks to the stellar rally in the stock market, mutual funds that invested in Indian equities have had a good run in 2014. While schemes that invested in large-cap stocks on an average have delivered 40 per cent gains, those that placed their bets on mid- and small-cap stocks have seen their NAV (net asset value) jump nearly 80 per cent since last December.

So, where did the mutual fund houses put their money? In terms of sectors, fund managers clearly dumped defensive themes such as pharma and IT and loaded up on cyclical themes such as financials, capital goods, auto and cement.

Despite concerns of weak credit off-take and poor asset quality, the expectation of a faster pick-up in the economy and improved credit growth once the RBI eases interest rates kept domestic institutions’ interest in this theme intact.

Even though state-owned banks continue to fight a losing battle against their private sector peers, who have been gaining market share steadily, fund managers accumulated their shares, with the country’s largest bank, State Bank of India, topping the list.

Other public sector banks that fund houses bought into include Andhra Bank, Punjab National Bank, Jammu and Kashmir Bank and Indian Bank. Among the private sector banks Federal Bank, Axis Bank, DCB, IndusInd Bank, HDFC Bank and YES Bank saw buying interest from fund houses. While SBI, Axis Bank and Federal Bank have gained in excess of 80 per cent so far in 2014, DCB has been the best performer in the banking space, gaining 94 per cent in the last 12 months.

Likewise, the expectation of a softer interest-rate regime and economic recovery spurred investor interest in engineering and capital goods stocks. The ones that fund houses added the most include Praj Industries, Greaves Cotton, Carborandum Universal, Cummins India and Action Construction Equipment.

Sensing the export opportunity in auto and its ancillaries, fund houses adeptly increased exposure to this segment as well. Here again, domestic fund managers preferred commercial vehicle makers — Ashok Leyland and Tata Motors — possibly hoping they would ride the anticipated economic recovery.

Ashok Leyland, whose stock price more than trebled in the last one year, was the best performer in this space, followed by VST Tillers, which gained 120 per cent during this period. Escorts, Hero MotoCorp and Maruti Suzuki were the other stocks that fund houses bought this year.

In the ancillaries space, fund managers preferred specialised component makers such as NRB Bearings, Timken India, Banco Products (India), SKF, Automotive Axles, Sundaram Clayton and Gabriel. These stocks have more than doubled so far this year.

Falling lead prices possibly lured fund managers to increase exposure to automotive battery maker Exide Industries. The stock, however, underperformed its peer Amara Raja Batteries, gaining a modest 35 per cent.

Even as domestic fund houses got it right with cyclical themes, they missed out on the opportunity in pharma.

For instance, they turned sellers in Torrent Pharma, Suven Life Sciences, Aurobindo Pharma, Alembic Pharma and Shasun Pharma.

But the prices of these stocks more than doubled this year. Likewise, domestic mutual funds reduced exposure to consumer goods and IT stocks. Dabur India, Jyothy Laboratories, Hindustan Unilever, Nestle and Emami topped the list of consumer stocks that were dumped by Indian fund managers.

Similarly, large-cap IT stocks lost their appeal; fund houses reduced their holding in Infosys, TCS and HCL Technologies this year.

In the mid-tier IT space, stocks of Polaris Consulting, Nucleus Software, Persistent Systems and e-Clerx also saw some profit taking by domestic fund managers.