Fund houses often emphasise the idea of sector rotation that involves shuffling among different segments, done based on a host of factors and criteria. When the fortunes of economies and industries fluctuate, businesses experience their own periods of expansion and contraction. In other words, businesses have their own cycles that are caused by varied factors.
Typically, the four phases of an economic cycle that characterises businesses as well include expansion, peak, contraction and a slump.
Based on how different sectors in the economy cope with various stages of a cycle as well as the prevailing market conditions (valuations, liquidity, fundamentals etc), fund managers churn their holdings.
At market peaks and stretched valuations, sector churn becomes even more important to de-risk portfolios.
In this regard, Bandhan Mutual Fund has come out with a new business cycle scheme that looks to make the most of navigating through cycles smartly. The fund is open for subscription till September 24.
Read on to take an informed call on whether you should invest in the Bandhan Business Cycle fund.
Gaining from cycles
As mentioned earlier, each phase of a cycle has its own dynamics. In the expansion phase, economic activity is buoyant, industrial capacity utilisation rises rapidly, there is increase in government capex and growth in credit, even as consumer spending is healthy. In such a situation, financial services, consumer discretionary, real estate and metals may do well, while software, pharmaceuticals etc may find less favour.
At the peak of a cycle when interest rates are high and even private capex kicks in, most of the parameters mentioned earlier are strong and possibly stabilising. Sector preferences remain similar to the expansion phase, but may be energy could be an added sector choice.
In the contraction phase, most economic parameters and industry factors are on a declining mode. There is considerable moderation in capex as well. At these times, IT, pharmaceuticals, consumer staples and utilities could be preferred bets, while financial services, real estate and metals could possibly be shunned.
In the slump phase, key parameters hit rock bottom levels and there is considerable pessimism. Here again, sector preferences remain similar to the contraction phase.
These sector preferences or disinterest are not exhaustive and only indicative. Broadly, over the past 10-15 years, these are the segment choices based on market and economic conditions.
Fund approach
Bandhan Business Cycle Fund will take a top-down approach to sector selection based on business cycles. But stock selection will be done with a bottom-up approach by taking valuations, company fundamentals and management quality in consideration.
The fund seeks to track more than 40 macro indicators to identify sector opportunities. A few of these indicators include unemployment, fuel consumption, rail freight traffic, inflation, import-export growth, tax collections, cement and stell production, deposit and credit growth, and e-way bills generated, among many others.
A flexi-cap approach will be taken in stock selection with no specific bias towards large-, mid- or small-cap stocks.
On sectors, the fund is expected to deviate significantly from the benchmark Nifty 500 TRI on the proportion held in the top few segments.
Interestingly, the fund house has indicated that the scheme could hold up to 15 per cent in cash as part of risk management.
What should investors do?
As a concept, business cycle funds sound interesting. But sector rotation is a function that even regular diversified funds are expected to do regularly. However, business cycle funds can be more opportunistic in churning sectors based on industry and economic cycles. Returns can be lumpy and sector rotation may not turn out smoothly as envisaged.
Barring HSBC Business Cycle Fund, no other scheme has a track record of more than five years and must be your first choice while opting for this. Its five-year compounded annual return is a robust 26.4 per cent, comfortably beating the Nifty 500 TRI by four percentage points. Most other funds have been around for three years or less.
However, investors who want a fresh approach and have a high-risk appetite can consider small SIPs in Bandhan Business Cycle Fund as a diversifier.
