Stock market investors develop a liking for quality businesses which enjoy sustainable competitive advantages. The allocations made to these companies in high conviction portfolios tend to be high. In this section, we have listed a few of these companies in terms of their popularity with India’s Fund Managers.
Indian Mutual Fund’s tend to be more focused on short-term peer relative behaviour, seeking short-term payoffs to generate sales/distribution. Given there is a lower presence of long-term pension related investments (compared to developed markets), it tends to be a shorter-term performance horizon. Stock turnover tends to be high, particularly for flagships funds of the asset management company, where so called “star” portfolio managers look for the next exciting story, whilst keeping one eye on positioning of their peer group.
However, given approximately 6,000 listed stocks on the NSE/BSE, Multi, Mid and Small Cap fund managers have a significant number on unique stock names to select from. As we descend the market cap curve, the unique names in portfolios increase, given differentiated insights based upon internal research rather than brokers. The ability to source new ideas and identify growth opportunities is a practiced skill, which is not necessarily easy to access in the appropriate way.
We study holdings of Multi-Cap Funds which are equivalent to all cap equity funds, with a mandate to look across the market cap spectrum to find growth and value. Some of the key observations of the study were:
- The quarter witnessed quite some changes in the preferences of mutual funds in India, HDFC Bank though remained as the most preferred company in India amongst the multi-cap fund managers
- Preference for technology stocks increased potentially as a defensive bet providing valuation comfort during times of market volatility. Three stocks Infosys, TCS and HCL Technologies made it to the list top 20 preferred most stocks. Earlier only Infosys was part of the top 20 most preferred stocks
- Fund managers continued to prefer private sector banks, the preference though reduced during the quarter. Besides HDFC Bank, ICICI Bank, State Bank of India and Kotak Mahindra Bank were amongst the top 10 most preferred stocks
- Larsen & Toubro (Industrial), ITC (Consumer Staples – Cigarette), HDFC (Financials), Maruti (Consumer Discretionary – passenger vehicles) and Mahindra & Mahindra (Consumer Discretionary – Utility Vehicles) were the other most preferred stocks i.e. in the Top 10
- Reliance Industries, NTPC and Bajaj Finance were some of the stocks that moved in the preference and were amongst top 20 most preferred stocks. Bajaj Finance moved into the top 20 most preferred stocks during the quarter with 2 more funds buying into the company
Few Portfolio Managers exited from Sun Pharma (5 funds exited) and Tata Motors (7 funds exited). The continued disappointment from these companies (Sun Pharma on US pricing related issues and regulatory woes and Tata Motors – loss of market share in domestic business) to deliver growth would have enthused the exits, despite valuations of both companies being attractive
Exhibit 17: Most Preferred Stocks of Indian Multi cap Funds
Source: ACE MF, India Avenue as on 30thJune 2018