Macro-issues hit performance

Hike in policy rates, tight liquidity, rising bad loans and restructured accounts, all took a toll on banking stocks last year.

Consequently, funds focused on the banking sector have underperformed. Banking funds have lost close to 42 per cent of their NAVs between the November 2010 peaks and the December lows.

That said, theme funds focused on the financial sector have recovered in the last six months (average return of 22 per cent) in line with the market, predominantly due to a cut in the reserve ratio, fall in policy rates and attractive valuations of some banks.

Average loss

The average one-year loss of banking and financial services funds (banking ETFs) was 11.3 per cent as compared with 8.8 per cent decline of the broader market index, BSE 500 index.

Reliance Banking ETF and ETFs focussed on public sector banks pulled down average returns.

Actively managed funds put up a better show than passive funds over the last one year.Passively managed funds, Goldman Sachs PSU Bank ETF and Kotak PSU Bank ETF, lost 15.6 per cent and 16.3 per cent respectively. That happened because public sector bank’s stocks lost more than private sector’s.

High proportion of restructured loans (due to exposure to stressed sectors such as power, steel, aviation and telecom) and a sharp rise in non-performing assets hit the profitability of public sector banks severely. Strangely, Reliance Banking ETF lost around 13.2 per cent mainly due to the disparity between the price and the actual NAV. While the NAV is Rs 1,050, the trading price is close to Rs 889.

Better than benchmark

While none of the funds delivered positive returns over a one-year period, five out of six actively managed funds bettered their benchmarks over the last one year. ICICI Pru Banking & Financial Services managed the top slot with a focus on private banks and higher weights to mid-cap banks.

Mid-cap picks such as Karur Vysya Bank, City Union Bank and IndusInd Bank along with HDFC Bank, Sundaram Finance, Mahindra Finance and IDFC delivered positive returns in this period.

Sundaram Financial Services Opportunities Fund was the only actively managed fund that underperformed its benchmark. The fund, in spite of holding a diversified portfolio and higher cash levels for most part of the year, could not beat the benchmark. The fund did not also do as well as its peers in the recent rally (from December) leading to the overall underperformance. Its exposure to public sector banks and banks such as Axis Bank and ICICI Bank, which lost more than one-fifth of their value, has also not helped the fund.

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