MF exposure to top 10 Nifty cos at 10-yr high in quest for alpha

Mumbai: Mutual funds have been progressively increasing their exposure to the top ten Nifty stocks to reduce underperformance and generate alpha. In 2019, as much as 60.62 per cent of mutual funds’ equity investments were in these from the Nifty50 stock by weightage, data from Value Research showed.This exposure in the top ten Nifty stocks is at a decadal high. In 2017, the corresponding figure stood at 50.09 per cent, while in 2018, it was 49.7 per cent.There is a statistical basis for high exposure to top ten Nifty stocks. These stocks have been clocking higher growth in their earnings per share (EPS) than the Nifty index. For instance, while the Nifty is expected to post 17 per cent growth, in its EPS for FY20, this group of stocks is expected to deliver 34 per cent growth in their earnings for the same period.Besides, analysts point out that the top ten Nifty stocks, in which foreign portfolio investors have high stake, not only offer earnings growth safety but also have relatively better cash flow and balance sheet to tide over uncertainty in demand. In addition, these stocks also have high liquidity which is comforting for portfolio managers.“Three factors contributed to this trend. These are category change, mid-and-small-cap downfall and the resultant shift to large-caps and steady deployment of funds by both mutual funds and pension funds. Within this, the narrow allocation to select Nifty stocks has ensured that fund managers taking exposure to these stocks do not underperform,” said Vidya Bala, founder of Prime Investors.She added that the markets are showing signs of a slightly broad-based rally since September 2019 and that we may see assets getting more diversified across stocks from this narrow allocation.“This dependence on the top ten Nifty stocks makes sense because these stocks not only keep your money safe but they are also recording decent earnings growth,” said Ashish Shanker, head, investment advisory, Motilal Oswal Private Wealth Management. “The GDP growth has declined to sub 5 per cent levels. There are very few triggers now which can indicate that a broad-based rally may transpire.”Until there is a broad based economic recovery, this is likely to continue, Shanker said, adding one can see visible signs of economic recovery and a broad-based rally only by the end of calendar year 2020.“In an environment when growth was slowing down, fund managers shied away from mid-and-small caps and stuck to quality companies. In the coming quarters, this polarisation will even out as growth comes back,” said Dhiraj Sachdeva, founder of Roha Capital Advisors. 73788656

from Economic Times https://ift.tt/2S7zhCV