The Hindu Business Line : Reliance Infrastructure: Focussed exposures will help

Unless an infrastructure fund provides focussed exposures to industries with high potential, its returns may be no better that those of regular diversified funds.

Vidya Bala

The country’s infrastructure story has once again caught the attention of the stock market, perhaps on the back of expectations of a higher thrust to the sector by the UPA Government in its second term.

Reliance Infrastructure, the new open-end theme fund on offer from the Reliance stable, will join the bandwagon of 20-odd funds betting on the infrastructure growth story.. Investment universe: Reliance Infrastructure will invest in sectors such as construction, capital goods, coal, cement, banks, mining and metals and electric and electronic components.

Going by the large investment universe suggested in the offer document, Reliance Infrastructure may turn out to be a more broad-based theme fund.

Reliance Mutual already manages another fund whose theme is a sub-sector of the infrastructure story (power) under the banner Reliance Diversified Power sector. This fund provides exposure to the entire power and energy space from generation to transmission and distribution.

Infrastructure sub-cycles: While the infrastructure story may be portrayed as a long-term investment opportunity, some industries within the broader universe fetch higher returns than others at different periods.

Reliance Diversified Power Sector, for instance, returned 24 per cent compounded annually over the last two years as against the 10.5 per cent returns yielded by ICICI Pru Infrastructure. The former, laden with stocks in the power and power-related sector was clearly an outperforming theme to hold, rather than a broader infrastructure fund.

The sub-cycles within the infrastructure sector would largely depend on the area of focus of Five-Year Plans as well as the ruling government’s development policies.

For instance, infrastructure funds that were heavy on stocks of road developers/contractors may not have outperformed over the last couple of years, what with the controversies over policy changes.

Looking forward, highway development, an area that lagged in execution, may receive a thrust in the forthcoming Budget.

An agriculture-friendly government, such as the one perceived to be in Andhra Pradesh, could similarly mean higher spending in irrigation. Besides infrastructure, capital goods companies too, may benefit from a revival in capex on an economic recovery. Unless an infrastructure fund is able to provide focussed, timely exposure to industries that hold higher potential within the broader spectrum, the returns may not be too superior to regular diversified funds. In other words, investors may have to review whether their funds do capitalise on the sub-cycles within the space.

Performance: At present, most infrastructure funds are heavy on the energy space (that includes power) with exposures as high as 30 per cent.

While most funds have made a comeback from the March lows with returns ranging from 50 per cent to over 100 per cent, top funds such as ICICI Pru Infrastructure and Reliance Diversified Power are not among the top gainers in the space. These funds still hold over 20 per cent of their assets in debt/cash.

A large asset size may have made it unwieldy for these funds to quickly move in to equities to gain from the recent rally. Most companies in the infrastructure space fall in the mid-cap market capitalisation segment, necessitating smaller size of market transactions at a time. A compact asset size may also, therefore, be paramount to a sector fund’s performance. Sundaram BNP Paribas Capex Opportunities scores on this count.

Suitability: Reliance Infrastructure’s objectives and strategy do not appear too different from the existing infrastructure funds. For this reason, investors may not be assuming a unique call by investing in the fund.

Besides, the current rally has resulted in the prices of a number of infrastructure stocks running ahead of their fundamentals, limiting the universe of ‘attractively valued’ stocks at present. The offer is open till June 23. Mr Sunil Singhania will manage the fund.

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