Tata Housing Opportunities is an open-ended equity scheme that is being launched to cash-in on the success of companies that gain from demand for real estate and allied segments.

The New Fund Offer (NFO) opens on August 16 and closes on August 29. This will be the third thematic fund on these lines, after HDFC Housing Opportunities Fund and ICICI Pru Housing Opportunities Fund . Instead of looking at realty companies alone, the Tata fund will focus on better quality businesses and those that exhibit lower cyclicality compared to pure-play real estate firms. Here's a review.

Housing as a theme

Housing continues to be one of the basic needs of people. Fundamentally, housing is a big investment theme given the influx into cities from the hinterland and from towns, and the consequent need for accommodation. This is also why the real estate sector has promising investment potential. The value chain starts from materials (cables, wires, ply, paints, etc.), construction players and finance companies.

Investor earnings calls from many companies shows that strong housing demand is being witnessed in most regions, given the stability in prices in recent years . In the past, we have seen the housing sector suffer due to excess inventory, regulatory changes, NBFC crisis and demonetisation.

But low interest rates, government policies and targeted sops have have helped revive demand. With macro events such as the pandemic now a thing of the past, there is renewed hope that real estate will see the new upcycle continue.

Such expectations have already driven up stock prices. The BSE Realty index is up 12.4 per cent in the last one year, compared to 9 per cent for the Sensex. Sectors connected to real estate such as finance (BSE Bankex up 10 per cent) and infrastructure (up 20 per cent) have also rallied. Allied industries related to real estate do have their own cycles, but housing sector upcycles are beneficial for them.

Fund strategy

The Tata Housing Opportunities Fund will be managed by Tejas Gutka, Venkat Samala and Murthy Nagarajan.

The fund's benchmark (Nifty Housing) has 50 stocks, with biggest weights in financials, consumer durables, construction materials, power, construction, metals and mining, oil & gas and real estate. The fund can pick stocks from industries such as banks, sanitaryware, cables, paints, glass, electric utilities, electronics, cement, iron & steel, furniture, home furnishing, LPG/CNG/PNG suppliers, air conditioners, housing finance companies, home appliances and plyboards/laminates.

India still does not have an adequate number of listed real estate companies for a fund to invest in them, so housing theme funds have to be played in a broader manner.

Given that the mandate of all housing thematic funds is similar, it is interesting to see how the HDFC and ICICI Pru schemes have played this theme so far. Six of the top-10 fund holdings in the HDFC and ICICI Pru schemes are the same (L&T, HDFC Bank, ICICI Bank, NTPC etc.), though there is difference in assigned weight (see table).

The most favoured sector of the existing funds is banks (over 30 per cent weight each). Finance, cement, construction, ferrous metals and consumer durables are also key positions. Also, in terms of m-cap, both funds are predominantly largecap-oriented, but while the HDFC scheme has given 16 per cent weight to smallcaps and 7 odd per cent to midcaps, the ICICI Pru fund has 10 per cent in midcaps and 6 per cent in smallcaps.

What should investors do?

The success of housing as an investment theme depends on whether the economic and sectoral turnarounds sustain. This aspect is not particular to this theme alone. Entry and exit from thematic funds should be timed to perfection due to their cyclical nature. The HDFC fund, for instance, since its original launch in December 2017 as a close-ended scheme, has given 5.5 per cent annually. While allied industries/ sectors can cap cyclicality in a housing fund, they cannot be a complete hedge. Also, since housing demand is interest rate sensitive, investors have to take a call on whether in a rising rate scenario, real estate demand can remain strong.

Investors should also note that housing-focused thematic funds invest majorly in largecap financial services, consumer goods, cement, construction, power and metals stocks. These stocks are present in diversified fund portfolios as well, with large allocations to them. Unless the portfolio is really differentiated, adding thematic funds, in our opinion, may only add to extra positions in stocks already indirectly in their portfolio. One may argue that the recent correction provides an opportunity to buy stocks at a cheaper valuation. But, that is applicable to a large part of the listed market, not just housing theme stocks.

As a thumb rule, investors looking at thematic equity exposure should allot only 5-10 per cent of their overall equity portfolio to such avenues.