Manufacturing Defense, ESG, Infrastructure, ETC...What to check?

Where did the ESG Funds went?  Did so many themes gave returns or they just disappeared. The market always gives opportunity for new products and the Indian financial services industry is one of the most player within this category. In the recent past India have bene focusing on PLI and converting itself from import driven economy to an export driven economy in various sectors like defense, manufacturing, and allied industries.  The Indian mutual Fund industry have already started witnessing Manufacturing funds and Defense funds being offered to the client. 

We remember an era in 2004-2005 that infrastructure was the music in the air during that time and hence many Asset Management houses came up with infrastructure funds, Pharma funds, IT funds etc. Sectors funds also witnessed significant merger of many schemes.  In the recent couple of years post Pandemic there is a significant surge of thematic funds.

Between October 2022 and October 2023, the assets under management (AUM) of sectoral and thematic funds soared by 30%, reaching a substantial ₹2.18 lakh crore. This remarkable growth underscores a significant shift in investor preferences towards specialized funds, driven by various factors beyond just attractive returns.

The appeal of sectoral and thematic funds lies not only in their potential for higher returns but also in their targeted exposure to specific industries or themes that align with evolving market trends. In 2023, thematic funds focusing on the Public Sector Undertakings (PSU) sector stood out with impressive returns of nearly 54%, showcasing robust performance and investor confidence in this segment.

Sectoral funds, particularly those concentrating on infrastructure, also delivered strong returns of approximately 40%, buoyed by renewed government focus and investments in infrastructure development projects. Meanwhile, technology funds remained resilient, offering returns exceeding 27%, reflecting ongoing digital transformation and technological advancements across sectors.

However, the banking sector faced challenges, underperforming with returns around 18%, lower compared to the stellar performances of PSU and infrastructure funds. This divergence highlights sector-specific risks and varying market conditions impacting fund performances.

Consumption-focused funds maintained steady growth, providing returns around 24%, driven by consistent consumer demand and spending patterns despite broader economic fluctuations.

The surge in AUM of sectoral and thematic funds from October 2022 to October 2023 illustrates a strategic shift among investors towards specialized investment avenues. Beyond the allure of high returns, these funds offer targeted exposure to sectors poised for growth, reflecting investor confidence in thematic investment strategies amid evolving market dynamics.

Understanding these trends is crucial for investors navigating the complex landscape of sectoral and thematic funds, enabling informed decisions aligned with their financial goals and risk appetite in a rapidly changing economic environment.

Now the industry is moving towards Electric Vehicle thematic funds, PSU, Manufacturing, Défense, Housing, Innovation, Chips and AI focused etc.  In the coming years we will witness many more variety and this is the place whereas advisor needs to keep in mind about the asset allocation model.

 With changing times a financial advisor needs to have certain bucket for thematic/sector funds within the satellite portfolio but with caution.  The caution is that if the client has 10% allocation to thematic themed Mutual Funds, then he should keep in mind that there is no overlap of portfolio. Yes, this is the most important part. Diversification within the portfolio is important.  For example, as per the below chart its being found that most of Manufacturing Funds are tilted towards automobile sector.  But this is this over exposure is necessary for the client?

The sectoral allocation of manufacturing sector mutual funds provides valuable insights into the investment strategies and sector preferences of several prominent funds. Here's an in-depth analysis based on the allocation data for June 2024:

Automobile & Ancillaries

• Axis India Manufacturing Fund: Leads with 29.32% allocation, indicating a strong focus on the automobile and ancillary sectors, reflecting confidence in these industries' growth potential.
• Baroda BNP Paribas Manufacturing Fund: Shows a moderate allocation of 5.43%, suggesting a diversified approach within the manufacturing sector.
• Canara Rob Manufacturing Fund: Allocates 24.27%, focusing significantly on automobile and ancillary sectors, aligning closely with Axis India's strategy.
• HDFC Manufacturing Fund: Allocates 28.87%, emphasizing a similar emphasis on automobile and ancillary industries.
• ICICI Pru Manufacturing Fund: Dedicates 25.51% to this sector, indicating a balanced approach among the top funds.
• Kotak Manufacture in India Fund: Allocates 28.29%, showcasing a robust commitment to automobile and ancillary sectors.
• Quant Manufacturing Fund: Allocates 10.91%, with a smaller but still significant investment in this sector.

Healthcare

• Axis India Manufacturing Fund: Allocates 14.99%, demonstrating a substantial investment in healthcare alongside its focus on automobile sectors.
• Baroda BNP Paribas Manufacturing Fund: Allocates 1.48%, showing a minor allocation to healthcare compared to its peers.
• Canara Rob Manufacturing Fund: No specific allocation mentioned.
• HDFC Manufacturing Fund: Allocates 15.20%, focusing significantly on healthcare within its portfolio.
• ICICI Pru Manufacturing Fund: Allocates 7.53%, indicating a balanced approach towards healthcare investments.
• Kotak Manufacture in India Fund: Allocates 15.14%, aligning closely with HDFC's strategy in healthcare.
• Quant Manufacturing Fund: Allocates 12.01%, showing a notable investment in the healthcare sector.

Capital Goods

• Axis India Manufacturing Fund: Allocates 18.37%, indicating a substantial commitment to capital goods industries.
• Baroda BNP Paribas Manufacturing Fund: Allocates 1.20%, showing a relatively lower allocation to capital goods.
• Canara Rob Manufacturing Fund: Allocates 21.59%, emphasizing a strong focus on capital goods within its portfolio.
• HDFC Manufacturing Fund: Allocates 12.75%, reflecting a balanced approach to capital goods investments.
• ICICI Pru Manufacturing Fund: Allocates 11.34%, focusing on a diversified portfolio that includes capital goods.
• Kotak Manufacture in India Fund: Allocates 12.95%, showing a significant interest in capital goods.
• Quant Manufacturing Fund: Allocates 6.91%, indicating a moderate commitment to this sector.

Key Observations and Implications

1. Sectoral Diversification: Funds like Axis India and HDFC Manufacturing Funds exhibit robust sectoral diversification, investing heavily in both automobile & ancillaries and healthcare sectors.
2. Specialized Focus: Canara Rob Manufacturing Fund stands out for its focused investments in automobile & ancillaries and capital goods sectors, reflecting a strategic sectoral preference.
3. Risk Management: Diversification across sectors such as healthcare, capital goods, and others helps mitigate risks and capitalize on varied growth opportunities within the manufacturing sector.
4. Market Opportunities: Funds like ICICI Pru and Quant Manufacturing Funds demonstrate a balanced approach, spreading investments across multiple sectors to capture broad market trends and potential growth.
5. Emerging Trends: Sectors like healthcare and consumer durables are gaining prominence, as indicated by increasing allocations across several funds, suggesting emerging opportunities and investor confidence.

The sectoral allocation data provides investors with valuable insights into the strategic priorities and risk management strategies of manufacturing sector mutual funds. Understanding these allocations helps in making informed investment decisions aligned with sectoral growth prospects and market dynamics.

Being an investor, one would like to avoid overlap of portfolio. One needs a wide bucket of scripts and sector exposure when investing in a thematic fund.  Now when an investor has already exposure in two Manufacturing funds why one will invest in another one. Being a financial advisor, one should seek that the portfolio of an investor is aligned with the wider macroeconomic sector growth and not tilted towards few sectors. Since when Indian GDP will 5 trillion economy the growth will be broader economic sectors not narrowed to few sectors. An investor might lose the returns from being thematic agnostic.  

Every advisor should investigate the upcoming opportunities and should not chase Rs 10 NAV as option for deciding investor allocation.   If a Multicap or Large or Midcap fund offers similar stocks and sectors then what is the point of getting in thematic. Hence the thematic investment bucket also needs to be wider. Hence next time be careful for thematic since new opportunities of thematic will come and over allocation or wrong allocation might lead to loss of opportunity for those future products.