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stock market news: Looking for the next big theme in stock market? Try chef’s special!

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Portfolio allocation usually happens with a top-down approach. The broad allocation to equity, debt and any other asset classes is decided and then the allocations to sub-categories like largecap and smallcap are decided. The allocations are, at the end of the day, subjective.

It is the investor’s or the advisor’s assessment of the investment objectives, the positioning of the funds and suitability.

Robo advisory is yet to evolve to the levels of AI or other applications. Being subjective, it is open to debate and multiple ideas.

Largecap-smallcap, active-passive and diversified-concentrated, among others, are the aspects open to new ideas that weigh several options. Today, we will discuss these factors in the context of thematic allocation.

The major part of equity allocation goes to largecap, flexicap and such, as that is the staple component. One portion goes to a thematic or any other specialized idea from the fund manager, which may be analogized to “chef’s special” or “chef’s recommendation”.

The argument here is that in multicap or flexicap funds, the fund manager has the space or flexibility to play according to her convictions.

Then what is the requirement for sector- or theme-based funds? The rationale is that multicap or flexicap funds belong to a particular peer set, and are open to performance comparison on a frequent basis.

Beyond a point, the fund manager would not play according to her convictions in an “usual” fund. Thematic or idea-based funds are, in a way, taking a bet on the fund manager. While any fund performance depends on the fund manager, except passive funds, thematic ones being “chef’s special” are all the more about our conviction on the fund manager.

The USP of thematic funds is that if a sector or a theme looks promising, and the fund manager has a proven track record, the chances of making higher gains are rather high. The performance of sectoral or thematic funds is more dispersed when compared with other fund categories.

The difference in performance of flexicap funds and sector or thematic funds comes out in the following data. As on February 17, 2022, a basket of 21 flexicap funds (regular option) delivered an average five-year return of 14.3 per cent, annualised, with the best-performing fund delivering 21.4 per cent and the worst-performing being at 8.5 per cent hundred.

In effect, the range between the best and the worst-performing funds was 21.4-8.5 per cent.

Now, comparing this with a diverse basket of 73 sectoral or thematic funds, the five-year return till February 17, 2022 showed an average of 13.4 per cent (little lower than the average of the flexicap basket).

The best-performing fund here generated a return of 31.2 per cent, and the worst-performing one logged a return of 2.8 per cent, annualised. So, the performance range here was between 31.2 per cent (much higher than flexicap) and 2.8 per cent (much lower than flexicap).

Similar data over a 10-year history showed that in flexicap funds, the average of the basket remained the same as that of five years, and the range narrowed to 16.6-10 per cent. In the sector or thematic basket, the average was marginally higher, and here also the range narrowed to 23.7-4 per cent.

A look at the best-performing thematic funds can show which idea did well. Over a five-year period, the best-performing thematic funds were ICICI Prudential Technology Fund (31.2 per cent annualised), Tata Digital India Fund (31.1 per cent annualised) and Aditya Birla Sun Life Digital India Fund (30.1 per cent annualised).

We got a similar result over a 10-year horizon also: ICICI Prudential Technology Fund (23.7 per cent), Aditya Birla Sun Life Digital India Fund (21.4 per cent) and SBI Technology Opportunities Fund (20 per cent). However, the winning themes varied from year to year.

How about playing the themes through your high conviction AMCs or fund managers? The fund manager modulates the exposure to various sectors or themes or investment ideas playing out at that point of time. You, as an investor, do not need to move from one fund to another.

You can play sectors through sectoral index funds or ETFs also, but there would be tax implications on fund shifts. Sectoral allocation decisions are not impacted by the investor’s emotions (greed, fear, indecisiveness or such) but are objective decisions of the fund manager.

ICICI Prudential Thematic Advantage FoF, which plays opportunities across sectors, has over a period of three years delivered 23.9% annualized (regular option) till February 17, 2022. This is higher than the sector or thematic three-year basket average of 20%.

Over the last one year, the return was 26.1% against the basket average of 18.8%. Over a longer horizon, it was better than the thematic peer set average. On a similar fund positioning using multi-sectoral approach, some other funds that have done well over a long horizon.

They include Aditya Birla Sun Life India GenNext Fund, Franklin Build India Fund and Mirae Asset Great Consumer Fund.

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