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Are Technology Funds a good sectoral bet in the current market?
Wed, Aug 28, 2013
Source : Jeni Shukla, Citrus Interactive

The depreciating rupee is a big worry for the markets and policy-makers. However, if there is one industry that is smiling in this environment it is the Information Technology or IT industry. This is because a major share of the revenues in this sector is earned in US Dollars. With the US economy showing signs of recovery the prospects seem to be looking better for this sector. In fact, some reports indicate that the US demand for IT is the strongest since the onset of the 2008 crisis.

There are five mutual funds which invest solely in the Technology space. Those are – Birla Sun Life New Millennium Fund (AUM-Rs. 53 crore), DSP BlackRock Technology.com Fund (AUM-Rs. 44 crore), Franklin Infotech Fund (AUM-Rs. 127 crore), ICICI Prudential Technology Fund (AUM- Rs. 109 crore) and SBI Infotech Fund (AUM-Rs. 43 crore). BSL New Millennium Fund and DSP BlackRock Technology.com Fund are benchmarked against the S&P BSE TECk Index and the remaining three are benchmarked against BSE IT Index. BSE IT index comprises ten stocks in the IT (software) sector whereas S&P BSE TECk comprises stocks across IT, Telecom and Media sectors.

PERFORMANCE

In the first seven months of 2013, BSE IT Index has given an impressive return of 31%. In terms of absolute returns, Franklin Infotech Fund is the best performing in the last 5-year and year-to-date. SBI Infotech and ICICI Prudential Technolofy fund has the best performance in terms of 1-year and 3-year returns respectively. However, none of the funds have been able to beat the benchmarks in the last one year period nor year to date.

YTD

1-YEAR

3-YEARS

5-YEARS

SINCE INCEPTION

Birla SL New Millennium Fund

24.1

32.6

4.7

6.3

6.1

DSPBR Technology.com Fund

17.5

27.3

0.6

6.9

9.7

Franklin Infotech Fund

26.9

33.6

10.2

15.9

14.7

ICICI Pru Technology Fund

16.4

28.2

12.5

13.6

6.2

SBI Infotech Fund

25.7

35.8

10.5

10.7

9.9

BSE IT Index

31.2

39.5

10.8

15.1

NA

S&P BSE TECk Index

25.3

35.8

8.1

7.4

NA
  Returns as on July 31, 2013; Figures above one-year period are in CAGR terms

In terms of calendar year returns Franklin Infotech outperformed its peers in 2008 and 2009. ICICI Pru Technology was the best performing fund in 2010 and 2012 – both of which were predominantly bull market periods. In 2011, SBI Infotech was the best performing fund. In 2009, 4 out of 5 IT funds gave more than 100% returns. In the same year only 28 out of 145 equity diversified funds gave returns of more than 100%.

 

2008

2009

2010

2011

2012

Birla SL New Millennium Fund

-57.4

81.2

16.6

-21.8

3.7

DSPBR Technology.com Fund

-60.3

103.8

15.5

-21.9

4.3

Franklin Infotech Fund

-49.6

128.7

32.6

-15.5

0.3

ICICI Pru Technology Fund

-63.9

119.9

44.5

-18.8

17.1

SBI Infotech Fund

-64.4

121.6

24.9

-14.5

5.7

BSE IT Index

-50.2

124.2

31.6

-15.7

-1.2

S&P BSE TECk Index

-50.9

63.1

23.5

-16.5

1.4

All figures in %

PORTFOLIO

In terms of market capitalisation (averaged over the last 12 months) all the funds except ICICI Pru Technology are large-cap oriented. ICICI Pru Technology has a mid-cap heavy portfolio construction. This year mid-cap stocks have underperformed vis-à-vis large caps. This could be one of the reasons for ICICI Pru Technology Fund’s underperformance year-to-date.

 

SCHEME NAME

Large Cap (%)

Mid Cap (%)

Small Cap (%)

Birla SL New Millennium Fund(G)

84

13.7

1.1

DSPBR Technology.com Fund-Reg(G)

76.7

21.2

0

Franklin Infotech Fund(G)

90.5

6.3

0.2

ICICI Pru Technology Fund-Reg(G)

55.3

34.1

4.1

SBI Infotech Fund-Reg(G)

84.8

11.2

2.7

Stock Count. BSL New Millennium Fund has 20 stocks in its portfolio – the highest in the category. Franklin Infotech comprises 12 stocks – the lowest in the category. The rest of the funds have exposure to 14 stocks. DSPBR Technology.com Fund has reduced the stock holdings in recent years.

Stock Concentration. Franklin Infotech has the highest level of concentration to the top 3, 5 and 10 holdings – 85%, 92% and 96% respectively. ICICI Pru Technology Fund and DSPBR Technology.com Fund have the lowest concentration to their top 3 stock holdings – 55% and 59% respectively.

Sectoral Allocation. As on July 31, 2013 BSL New Millennium Fund has exposure to IT-Software (77%), Telecommunication (14%), TV Broadcasting & Software Production (5%), Printing and Publishing (2%) and Film production, distribution & entertainment (0.2%). DSPBR Technology.com has exposure to IT-Software (76%), Telecommunication (8%), TV Broadcasting & Software Production (5%) and IT-Hardware (4%). The other three funds have maximum exposure to IT-Software, followed by IT-Hardware and BPO/ITeS.

Turnover Ratio. The highest turnover ratio is that of SBI Infotech (67%), followed by DSPBR Technology.com Fund (57%), BSL New Millennium Fund (38%), ICICI Pru Technology Fund (19%) and Franklin Infotech Fund (1%). Even historically, Franklin Infotech has maintained a very low level of churn.

PROCESS

Franklin Infotech: As per the scheme mandate, at least 65% of the assets will be invested in IT stocks under normal circumstances. The money market instrument exposure can never be more than 60%. The fund has a blend of growth and value based approach. The Chief Investment Officer lays the broad investment parameters. The fund manager has autonomy in deciding stock selection, stock/sector concentration, timing of investments and so on within these guidelines. The approach is bottom-up.

DSPBR Technology.com: The fund focuses on technology and technology dependent companies. It includes hardware, peripherals & components, software, telecom, telecommunications, media & entertainment, internet and e-commerce. The fund’s mandate is to maintain a minimum 80% exposure to equity instruments. The debt exposure is limited to 20%. For defensive considerations the equity exposure may go down to 70%. The approach is top-down with a blend of growth and value.

BSL New Millenium: The fund is mandated to invest in technology, software, hardware, media, telecom, internet and e-commerce and other technology-enabled sectors. The stock picking approach is bottom-up. The fund targets 100% allocation to equities but the minimum mandate is 80%. Up to 5% of assets can be invested in unlisted equities. The scrip-wise exposure ceiling is limited to the weightage in the benchmark index.

ICICI Pru Technology: A large portion of the assets are invested in the stocks which are part of BSE IT Index. However, the fund is allowed to invest opportunistically outside this universe into stocks which are part of the IT Services industry.

SBI Infotech Fund: The fund is mandated to invest at least 90% of its assets into equity of IT sector. The cash allocation is capped at 10%. The investment strategy is growth-oriented.

PEOPLE

Here is a snapshot of the people managing the funds:

Scheme Name

Fund Manager

Managing the fund since

Work Experience

Birla SL New Millennium Fund(G)

Naysar Shah

October 3, 2012

10 years

DSPBR Technology.com Fund-Reg(G)

Vinit Sambre

July 1, 2012

11 years

Franklin Infotech Fund(G)

Anand Radhakrishnan

February 1, 2011

12 years

ICICI Pru Technology Fund-Reg(G)

Mrinal Singh

June 22, 2011

8 years

SBI Infotech Fund-Reg(G)

Anup Upadhyay

January 1, 2013

5 years

OUTLOOK ON THE IT SECTOR

The rally in IT stocks has been unexpected and has taken the market by surprise. We have not seen any remarkable growth in the AUM of the IT funds in the last 1 year or even in the current calendar year.  The return of Mr Narayan Murthy at the helm of affairs has no doubt rekindled the interest in the bell weather stock of the sector – Infosys, which was languishing for the last so many months. The better than expected result in the quarter ended June 2013 has further boosted the stock price performance. The other two major stocks of the sector – TCS and HCL Tech have also turned in an impressive performance, both in terms of their fundamental as well as stock price performance. It is noteworthy that almost a dozen stocks, including large caps stocks such as TCS and HCL Tech from the sector have crossed the levels that they had touched in the boom of 2000. This is happening globally also with the Nasdaq reclaiming its previous peak.

But one should not be guided by stock price performance alone. The falling rupee is encouraging investors to look at export oriented sectors and the IT sector with appx USD 75 bn of export earnings is no doubt the sector of choice. As long as the rupee continues to be weak, this interest will continue to be strong. The resurgence of the US economy is also sparking the investment in further innovation by US corporations. With the Euro and Japan also showing green shoots of growth, this may happen with other corporations in other parts of the world too. Indian companies are moving up the value chain of IT sourcing from the “Low cost” model to the more remunerative “High Value” model. Merger and Acquisition activity is also picking up in the mid cap segment of the sector with iGate merging with Patni and Baring acquiring a controlling stake in Hexaware.  Wage inflation and attrition have moderated in the sector making the companies fundamentally stronger. Also, in a gloomy macro economic scenario where many sectors are struggling to remain afloat and the IIP has fallen to -2.28% last month, Nasscom has projected 12-14% growth for the sector in 2013. This makes the IT sector a beacon of hope.

However, you also need to on your guard against some of the negatives. A sharp appreciation of the Rupee may reverse some of the sentiment in favour of the sector. It may also cause unexpected losses if the companies have unhedged positions. The amendments to the US Immigration Bill will also be a headwind for the sector and its impact will have to be closely watched.

CONCLUSION

IT funds can be part of your tactical investments in sector funds. It is recommended that the exposure to sector funds in your overall portfolio should be in line with your risk profile. We believe a sector fund should not be more than 10-20% of the portfolio and this should be decided after consulting your financial advisor. Franklin Infotech Fund and SBI Infotech funds have a concentrated exposure to primarily large cap stocks. ICICI Pru Technology and DSP Blackrock have exposure to both large and mid cap stocks. These funds, being mid-cap focused, may show higher volatility.  Birla New Millenium Fund will broadbase your exposure to sectors such as Telecom and Media also which may dilute the performance, but will also limit some of the downside. Therefore you have a variety of options within this sector depending on the concentration risk that you are comfortable with.
 
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