Street see-saw has funds gorging on pharma, cons non-durables

Mutual funds’ exposure to pharmaceutical and consumer non-durable stocks has hit one-year highs, thanks to better growth visibility and lower levels of risk associated with the stocks.

According to Securities and Exchange Board of India (Sebi) data on deployment of equity funds for June, the mutual funds’ exposure to pharmaceutical and consumer non-durables, as a percentage of total assets under management (AUM), touched 7.51% and 7.29%, respectively during the month.

In fact, the weightage of these two sectors has grown steadily since July 2010, when they weighed in with 6.04% and 5.88% of the total AUM, respectively.

Fund managers attribute this to better growth prospects and visibility in these sectors amidst the general uncertainty.
“Considering the uncertainty in the markets, sectors such as FMCG and pharma are preferred on account of the better visibility in earnings,” said Krishna Sanghavi, head of equities at Kotak Mahindra Asset Management Co.

Interestingly, consumer non-durables and pharma sectors have been among the top three best performers in the last 12 months, rising 25.86% and 14.23%, respectively compared with the broader market return of 3.64%.

“We are increasingly stressing on companies and sectors which meet key parameters like decent earnings growth with high visibility, strong free cash flows, high capital efficiency and non-reliance on external funding to meet growth targets over next 1-2 years. Currently, we are overweight on sectors like pharmaceuticals, media, IT and select companies in automobiles,” said Tridib Pathak, senior director - equities at IDFC Mutual Fund.

The difficult macro environment, where there has been a slowdown in investments along with a gradual rise in interest rates, appears to have hit investment-led sectors like industrial capital goods, power and cement.

The share of capital goods and power in the total AUM has come down by over 200 basis points (bps) over the last one year to 5.23% and 4.32%, respectively.

“There has been low visibility in terms of order inflows and execution due to a slowdown in investment side of economy and stalling of projects. For cement sector, the overcapacity continues to be a concern,” said Pathak.

The banking sector, however, continues to attract maximum inflows from mutual funds despite concerns on contraction in net interest margins. Mutual funds’ exposure to the sector has increased 22 bps sequentially and 340 bps year on year to 17.31% in June.

“Some banks are being looked at, but on a selective basis, with a preference for those with high CASA (proportion of current and savings accounts in total deposits) and so on.” said Sanghavi.

The sector allocations could change going forward, depending on the quarterly results, say fund managers.

“Any major sectoral rotation may wait till the earnings season is over,” said Sanghavi.