Are you in a stock market cycle that favours cyclical sectors? Or is it time to get more defensive? Is this the time to exit FMCGs or should you accumulate the banking sector? If these are the questions on your mind as an investor who likes to actively manage your portfolio, then the new fund offer of L&T Business Cycles Fund may be a scheme to watch out for.
L&T Business Cycles Fund is an open-ended equity scheme that will seek to ride across various business cycles by strategically taking exposure to sectors and stocks at different stages of such business cycles.
The new fund offer will close on August 13. The fund will reopen after the NFO period. SIP facility is available during the NFO as well.
The fund will be managed by Venugopal Manghat and Abhijeet Dakshikar. It will be benchmarked against S&P BSE 200 index.
Some sectors tend to do better than others in certain economic cycles. For instance, defensive sectors such as FMCG, IT or pharma have outperformed in market down cycles or in economic sluggish phases.
Similarly, during times of an economic uptick or when the economy is going through a massive investment phase, sectors such as banking, infrastructure, engineering or automobile have also seen rapid increase in their activity and a consequent re-rating in the stock market.
The outperformance of the FMCG space post the downturn in 2008, continuing until 2012 or the outperformance of banking, infrastructure or capital goods between 2003-07 are examples of defensives and cyclicals, respectively; outperforming in different business cycles.
The data given above shows the level of outperformance of cyclical and defensive sectors. Between end 2003-and 2007, considered as a high-growth phase or period of economic upturn, 75% of the stocks in the cyclical sector universe delivered compounded annual returns of more than 30%, while only 38% of defensives and other sector stocks delivered similar returns over the said period.
However, during the downturn (2007-13), 57% of defensive stocks managed returns more than 10%, while just a fourth of the cyclical stocks managed to cross the 10% return threshold.
What do the above statistics tell us? It suggests that taking sector-specific exposure, by say focussing on sector funds, could mean that you would lose out if your sector calls go bad. For instance, entering the FMCG space in 2013, based on the spectacular rally in the preceding 4 years could mean that you would be sitting on poor returns.
Similarly, participation in the infrastructure space, based on the rally until 2007, would have meant prolonged period of pain over 2008 to mid-2013. In other words, unless you understand business and economic cycles, you may lose out on timing them right.
On the other hand, diversified funds tend to take timely exposures to sectors based on business cycles by going overweight on such sectors. However, their diversified mandate may prevent them from going overboard on such sectors.
For instance, while many diversified funds currently hold overweight positions in sectors such as banking or engineering, they still hold healthy allocations in IT or pharma. In other words, they still remain diversified.
L&T Business Cycles Fund seeks to be differentiated from sector funds as it does not have to restrict its exposure to specific sectors. At the same time, it can take much more concentrated/focussed exposure to defensives or cyclicals (depending on what business cycle it is), than a regular diversified fund.
Currently, cyclical themes that would benefit from infrastructure – capital goods and engineering, or increase in automobile off take as the economy recovers, or sectors such as cement that benefit from significant operating leverage through improved capacity utilisation – could be some of the themes that the fund may look at.
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Disclaimer: Returns mentioned are past returns and are not indicative of future performance.