FMCG funds go slow

With the meteoric rise of cyclical stocks in the rally from September last year, the FMCG sector has lost its place as the apple of the market’s eye.

The two funds dedicated to this sector — ICICI Prudential FMCG and SBI FMCG — returned an average 4.1 per cent over the past year, far better than the drop of 7.3 per cent in their benchmark BSE FMCG index, but much lower than the average one-year return of 28 per cent from Sensex and Nifty.

But since the FMCG sector ruled strong in earlier years, the longer-term picture is vastly different.

The two FMCG funds posted an average three-year annualised return of 20.6 per cent and five-year returns of 28 per cent, beating the Nifty’s 11 per cent and 12.5 per cent in the same periods.

The BSE S&P FMCG index was on a strong bull run since early 2009 to July 2013, when it touched an all-time high of 7600. Since then, the index has been consolidating sideways between 6,300 and 7,100; this could be the base building process for the next bull run.

Valuations of FMCG stocks shot higher, widening the premium they commanded over the market, on healthy fundamentals.

Companies held sales and profit growth steady and their relatively low share of overall consumer spending, a vast rural reach, and overseas efforts helped.

In the previous fiscal, though, volumes took a blow for most as high living costs blighted consumer sentiment. Meanwhile, the future brightened for the beleaguered infrastructure, manufacturing and banking sectors, taking the shine off the traditional ‘defensive’ FMCG sector.

Another reason for the poor one-year record is the dominance of a single stock in the portfolio, ITC.

SBI FMCG, a step ahead in performance with a year’s return of 5.7 per cent, has 42.6 per cent of its allocation in the stock. ICICI Pru FMCG increased its weight in ITC to 49 per cent; the fund’s one-year return is lower at 2.8 per cent.

The ITC stock has been lacklustre over the past one year.

SBI FMCG also tilted more towards mid- and small-cap stocks that account for half of its portfolio, providing a good foil to ITC.

Stock holdings in Kansai Nerolac Paints, Agro Tech Foods and VIP Industries, which did well in the past year, ranged between 3 and 6 per cent.

ICICI Pru FCMG fared worse than its peer; apart from placing a heavier weight on ITC, it exited good performers Nestle India and Hindustan Unilever.

But a strong performance of Britannia Industries, which the fund added in August 2013, lifted portfolio returns.