While investing in conglomerates has always been a broader idea, it is now officially a sub-theme within the thematic space with BSE launching its Select Business Group Index on October 8. Adding more to the fray, Tata MF has launched an index fund tracking the benchmark index while Aditya Birla Sun Life MF is out with an active fund benchmarked against the index.
Tata BSE Select Business Group Index Fund will officially be the first fund in this space, NFO of which closes on December 9. Aditya Birla Sun Life Conglomerate Fund, a close second and the only active fund in this space now, is open until December 19.
We try to dissect if this space puts on the table a differentiated approach and where the risk reward scale is tilted, and what should investors do.
About the index
BSE Select Business Group Index measures the performance of top 30 companies from the largest seven business groups in India, based on free float from the BSE 500 index, specifically excluding the companies belonging to the financial services sector. Currently, the seven business groups part of the index are Adani, Aditya Birla, Tata, Jindal, L&T, Mahindra, and Reliance (in no particular order).
The index is reconstituted semi-annually in June and December. While the weights are rebalanced on a quarterly basis, with weight cap at 23 per cent at both the individual stock and business group levels.
Concentrated exposure
The benchmark index and hence, Tata BSE Select Business Group Index Fund, proposes a concentrated approach with top 5 and 10 stocks adding up to 55 per cent and 71 per cent respectively. Picked from a niche universe of top business groups, the index is skewed marketcap-wise with large-cap exposure at 97 per cent.
While around 19 industries are covered by the index, there is no exposure to some of the best performers since Covid-19 , such as healthcare, pharmaceuticals, chemicals and realty, while exposure to FMCG, the defensive bellwether, is negligible.
While BSE Select Business Group Index has outperformed Nifty and Sensex across one-year, three-year, five-year and 10-year time horizons, outperformance against Nifty 100, Nifty 200 and Nifty 500, is only in the five-year and 10-year periods. The underperformance in the one-year and three-year periods could be attributed to the relative underperformance in IT, construction materials and oil and gas since 2021, which constitute around 42 per cent of the index. Also, no exposure to financials could add to underperformance in the coming years, considering the sector’s strong linkage with the broader economy.
This risk, is partially negated by ABSL Conglomerate Fund with the universe of conglomerates relatively larger at 36 and universe of companies at 169, consequently enhancing the probability of a wider sectoral coverage and mitigating the concentration risk. While the group exposure is capped at 25 per cent, relatively similar to the index, how many business groups find place in the index, alongside their weights, is a key monitorable.
With large and mid-caps accounting for just 21.3 per cent and 17.8 per cent of the universe respectively, and small-caps accounting for 60.9 per cent, the fund proposes to be tilted higher towards mid and small-caps than the universe.
ABSL Conglomerate Fund proposes to invest in holding companies to benefit from value unlocking on listing of their unlisted business arms. This, at best, is a medium-to-long term strategy and allocation towards the same will be another key monitorable.
High risk
Thematic funds are usually high-risk. This fund is no different, with limited universe to pick stocks from and meaningful exposure to conglomerates being a double-edged sword, considering the recent episodes in Adani and Raymond groups. While the fact that these conglomerates will have no dearth of capital, and venturing into new sunrise sectors and high growth opportunities is a given, an entry pass will just help that much, and sustaining and building a resilient business is another ball game.
Also, since exposure to most of the well-run parts of the conglomerates is not scarce in other funds across marketcap and sectors, this thematic space does not make a compelling case for investment. Investors could consider keeping these funds on their radar and track their returns, before investing in them.
