Infra schemes give decent returns as banking stocks perform

In today’s article we are concentrating on equity infrastructure schemes. An infrastructure scheme primarily invests in companies involved directly or indirectly in infrastructure activities/businesses.

At a fundamental level, it will only include capital goods and engineering companies. But the theme can be extended to encompass cement, construction, refining and even telecom stocks.

Real estate stocks too have found their way to these portfolios. What does appear startling is the presence of banking companies in an infrastructure fund.

The logic? Financial institutions such as HDFC and IDFC also lend to the infrastructure sector. Thus these funds may not be perfect thematic or sector funds unlike PSU bank or media and entertainment funds due to their broad coverage of industries and sectors.

The asset allocation normally is 65% in infrastructure related companies and rest 35% is in debt instruments and cash equivalents.

ICICI Prudential Infrastructure Fund - Growth
Launched in 2005, ICICI Prudential Infrastructure Fund is the largest infra fund with a corpus of `3,604 crore as of October 2010. The fund has underperformed the benchmark Nifty as well as its peers in the last two years.

Maintaining proper cash levels is critical in the downtrend market as it may result in heavy selling pressure, which was seen in the October 2008 (-24.33%). Therefore in 2009 and 2010 the fund has maintained current assets in the range of 7% to 11%, which is required considering the fund size.

Considering the above factors and higher concentration on selected sectors (top five sectors account for 61.37% of the portfolio), the fund appears to be suitable for high-risk high-return investment strategy. Sankaran Naren has been managing this fund since October 2005; he has over 20 years of experience in fund management, equity research and operations.

Birla Sun Life Infrastructure Fund - Plan A - Growth
After the mayhem in 2008, the fund recovered smartly and delivered the best returns in the last two years.
However, the returns are in line with the market index returns, which is a good sign considering the underperformance of various infrastructure stocks. In the last two years banking sector went up smartly and outperformed the benchmark index.

One of the reasons for higher returns could be the gradual increase in the share of heavy weight banking sector from 8% in March 2009 to 16.22% in September 2010.

The fund allocation has been evenly divided between the stocks as the holding in top 10 stocks (29.72% of the total portfolio) are in the range of 2-4%, which shows proper diversification and reduces the company-specific risk on the overall portfolio.

The fund has maintained cash levels at proper times and invested appropriately both in the bear and bull phases. Since September 2010 the fund has offloaded some equity holdings and increased its cash level from 1.75% to 4.70%. The fund size is `565.07 crore (October 2010) and it managed by Mahesh Patil since the inception. He has 13 years of experience.

Canara Robeco Infrastructure Fund - Growth
The fund was launched in December 2005 and has an asset size of Rs148.87 crore as on December 2010. Due to lower asset size, the fund is able to deliver comparably good returns. Since launch, the fund has delivered CAGR of 17.48%.

Like ICICI Prudential Infrastructure, it was concentrated highly on selected sectors. However, the concentration has reduced rapidly since September 2010 from 61.95% to 42.94% in December 2010.

The fund has managed to deliver handsome CAGR returns of 44.07% in the last two years. Since May 2008, the fund is managed by Anand Shah. He has an experience of nine years in asset management.

Tata Infrastructure Fund - Growth
It is the second oldest fund in the infrastructure category launched on December 31, 2004 and has built a very strong asset size of Rs1,871.76 crore as of December 2010. Since inception the fund has delivered higher returns of 22.91% due to the strong bull market before the year 2008.

It has got the lowest portfolio turnover ratio of just 34% but a higher expense ratio of 2.5%.  Till September 2010 the fund was almost fully invested (current assets at 0.56% of the portfolio) in the equity market.

Thereafter it offloaded some equity holding at the peak levels and increased the cash reserves to 2.82% in December 2010. Since inception the fund is being managed by M Venugopal. He has 18 years of experience, mainly in equity market.

UTI Infrastructure Fund - Growth
Despite having a healthy fund size of Rs1,567.20 crore as of October 2010, the fund has not been able to deliver returns up to the mark.

Being the oldest fund in its category, its ranks last in the top five schemes in the overall returns. It has delivered 21.69% since the launch. The cash levels were maintained and invested properly. However, one of the major reasons for the underperformance could be no exposure in the banking sector since the last three years. Deploying cash at the right time failed to deliver better returns because the bull market in 2009-2010 was due to the outperformance of specific stocks and sectors like banking and not the broader market.

Hence, not only  investment at the right time is  critical, but investment in right  sectors and stocks should go hand in hand to deliver higher returns. The fund is managed by Sanjay Dongre since its launch in March 2004.