Sectorwise Allocation Steers Portfolio Performance

It has long been held that the economic environment and the industry in which a company operates determines two-thirds of its stock performance. Extending the same logic to equity mutual funds, their performance is more a matter of correct sector allocation rather than of which company they invest in. This does not mean that putting money in funds which
invest in the right companies will not yield results. However, what we are emphasising here is that the chance of better performance is enhanced by selecting companies from the right sector.

This fact is exemplified in the analysis of the last one year’s performance of all the equity diversified funds, including sector funds. The top quartile is dominated by funds that are dedicated to fast moving consumer goods (FMCG) and pharmaceutical companies. Funds that lie in the international category, including some exchange traded funds (ETF), also fall in the top quartile. In the last one year (from May 28, 2011 to May 27, 2012), the Sensex was down by 10 per cent, whereas the BSE FMCG Index was up by 21 per cent. During the same time, the BSE HC Index is up by eight per cent. What is surprising is that on an average only funds in these two sectors have given positive returns over the last one year.

The average return generated by the FMCG and pharmaceutical sectors in the last one year is 28.44 and 5.62 per cent respectively. Some may argue that only a limited number of funds are dedicated to these sectors, and hence, the better performance could just be a fluke. Therefore, we analysed the exposure of pure equity diversified funds, which have performed better in the last one year. We found that they have more exposure to these sectors, which helps them to boost the performance. For example, Reliance Equity Opportunities, one of the best performing pure equity diversified funds over the last one year, has the highest exposure to the Healthcare sector, at 15.46 per cent of its net assets. Similarly, other well performing funds like IDFC Premier Equity have maximum exposure to the FMCG sector.

We have talked enough about the funds that performed well and their exposure. Now, let us check if the opposite also holds true. Does an exposure to bad sectors lead to bad performance? In the bottom quartile are funds which are dedicated towards banking and infrastructure. On an average, 27 funds are dedicated towards the infrastructure sector and have generated negative returns of 16 per cent, whereas 11 banking funds have yielded negative returns of 10.75 per cent. If we look at the performance of the BSE Bankex in the last one year, it is down by nine per cent, whereas BSE CG, which is a proxy of the infrastructure sector, has given negative returns of 30 per cent. Now, let us check with some of the worst performing equity diversified funds and their exposure. For example, DSPBR Opportunities Fund, whose NAV is down by 13 per cent in the last one year, has maximum exposure to the financial sector, contributing 28 per cent of the entire asset of the fund.

Therefore, we believe that a winning portfolio that makes money for you is one that invests in the right sectors. Hence, we advise our readers that before investing in funds, they should look at the broader market trends and sectors that are going to be favourites of the market. This will help you to generate better returns by riding on the appropriate sector story.