|
Infrastructure Funds: Hot Property!
Well, here is one opportunity that everyone is sure about – the
infrastructure sector. Investors are pouring money into infrastructure
stocks and funds. The logic is very simple. India is a growing economy and
there is huge demand for infrastructure. So, these companies are likely to
see exemplar growth. Indeed, this is right. What is also true is that you,
the investor, are exposing yourself to a high risk by investing in the
sector. It’s time you took stock of the situation.
Before proceeding, here’s a word of caution. In this note we are not
taking a call on when rationality will return to the stock markets with
respect to the valuations of atleast some of the infrastructure stocks. We
are simply focusing on whether you should be invested in infrastructure
funds, and if yes, what should be the allocation.
These days it is not uncommon for us to meet clients who have invested
over 20% of their portfolios in dedicated infrastructure funds. Add the
infrastructure component that is present in the diversified equity funds
and what you have is an allocation well in excess of that (maybe as high
as 35%). Well, even if you are an investor who has a high risk appetite,
this kind of an allocation may be stretching it too far.
The risk factors
Without delving too deep into the analysis of the sector, here are
some points of concern you need to keep in mind when evaluating the
prospects of the infrastructure sector:
One, there is indeed a tremendous growth opportunity; however, will this
growth be profitable? Given that the competition is already very intense,
profitability will be a big issue. Ultimately, stock prices track earnings
growth, not sales growth.
Two, with more multinational engineering and construction companies coming
to India, the competition is likely to intensify further. Profit margins
in India are higher than the international average; there is no guarantee
that margins in India will not move to the international average. If this
were to happen, profitability will be hit.
Three, with demand growing so rapidly, and companies stretching themselves
to grow, execution risks arise. Any failure on the execution front (lapse
on recruitment, quality related issues, delay in execution) could have
significant monetary and non monetary consequences for the company. We
recently met one of our clients, who works in a reputed company that is
into engineering and construction. On being asked what the biggest
challenge his company faces, his answer was very prompt – execution risk.
For some reason investors, who are outsiders, are ignoring this risk
completely!
Finally, from a stock market perspective, as a smart investor, you need to
evaluate how much of the future growth and the potential risks are
factored into the stock price. Only if the risk-return ratio is favourable
should you consider an investment; if you were to go by this criterion,
not many stocks would find favour.
And this takes us to a very critical point. Why restrict your fund manager
by limiting his mandate to investing only in infrastructure stocks?
If you have selected a good asset management company (AMC) with a smart
fund management team, give them the flexibility to invest the monies
across sectors. Of course if they find something attractive in the
infrastructure sector, as per their criteria, they will own it for you.
So our recommendation to you is avoid infrastructure funds. If, however,
you have a huge appetite for risk maybe you should consider having 5%-10%
of your monies in such funds (and that too in funds which are from AMCs
that you can entrust your monies to!). Anything more than that and you are
taking undue risk.
Here are some numbers to ponder over – The 20 Best
Performing ‘All-Equity Funds’ over 1-Year
| Equity Funds |
NAV
(Rs) |
1-Mth
(%) |
6-Mth
(%) |
1-Yr
(%) |
Since
Incep.
(%) |
| Reliance Media &
Ent. |
30.12 |
2.3 |
22.2 |
92.4 |
47.2 |
| JM Basic |
26.85 |
8.8 |
31.0 |
89.0 |
34.5 |
| Reliance Power |
47.94 |
6.0 |
25.6 |
88.2 |
60.9 |
| DSP ML Tech. |
29.42 |
0.3 |
15.5 |
85.3 |
18.7 |
| StanChart Premier |
17.62 |
(0.3) |
25.0 |
82.2 |
36.1 |
| Reliance Banking |
49.14 |
6.0 |
25.5 |
75.2 |
45.8 |
| UTI Thematic
Banking |
24.88 |
3.5 |
13.5 |
73.5 |
30.8 |
| ICICI Pru. Service
Industries |
17.65 |
(0.5) |
9.4 |
73.0 |
39.7 |
| Taurus Starshare
|
49.78 |
7.0 |
17.0 |
72.9 |
12.1 |
| Sundaram Capex Opp. |
21.56 |
6.1 |
19.8 |
70.6 |
51.6 |
| DBS Chola Opp. |
32.63 |
5.0 |
13.7 |
70.1 |
13.0 |
| DSP ML Tiger |
40.33 |
5.0 |
17.4 |
69.3 |
56.4 |
| Magnum Midcap |
26.64 |
4.8 |
12.3 |
68.0 |
53.4 |
| Tauras Discovery
Stock |
18.58 |
0.5 |
9.9 |
67.8 |
5.2 |
| ABN AMRO Equity
Opp. |
25.94 |
3.4 |
19.5 |
67.7 |
50.3 |
| ICICI Pru.
Infrastructure |
22.82 |
5.4 |
16.7 |
67.4 |
50.0 |
| UTI Infrastructure
|
34.02 |
6.2 |
15.2 |
67.3 |
47.3 |
| Tata
Infrastructure |
29.26 |
6.5 |
19.2 |
66.7 |
53.9 |
| Reliance Pharma
|
26.21 |
3.1 |
27.0 |
66.1 |
35.8 |
| Reliance Growth |
324.13 |
4.0 |
15.6 |
65.3 |
34.1 |
| BSE Sensex |
|
6.1 |
10.4 |
44.7 |
|
| S&P CNX Nifty |
|
5.0 |
10.9 |
44.1 |
|
|
(Source: Credence Analytics. NAV data as on July 31, 2007.
Growth over 1-Yr is compounded annualised) |
What should investors do?
It is apparent that sector funds have dominated the performance charts
over the last one year. The infrastructure funds, which have been
highlighted in the table, grab the maximum number of places in this
listing. Now, as an investor, it is natural to consider investing in
sector funds and in particular the infrastructure funds. But as a smart
investor, it is important to realise that if you are looking at building
long-term wealth without taking undue risk, sector funds are best avoided.
But if you still wish to own them, ensure they account for no more than
5%-10% of your portfolio.
|
