Speciality Funds: Extra Returns

Dissecting Speciality Funds

Speciality funds define their orientation towards a section of the market and invest accordingly. For instance, a fund may carry an IPO theme and invest in IPOs, or it may carry a cyclical theme and invest primarily in stocks of cyclical sectors. But this doesn’t restrict them from investing elsewhere too. They do hop around in other sectors, but the core of their portfolios would constitute of its pre-decided universe of stocks.

In a way, these exotic funds tend to bridge the gap between a diversified equity fund and a sectoral fund. Diversified equity funds usually don’t put all their eggs in one basket while sectoral funds concentrate on just a single sector. Speciality funds are between these two with their selective diversification.

One category of speciality funds is the funds that invest in cyclical stocks or commodity stocks. Their investment approach rests on a simple economic premise that an economy goes through business cycles of boom and bust. The various business sectors respond differently during each of these phases. If automobiles or technology sectors do well during a boom, capital intensive or cyclical sectors perform best when the economy is recovering.

Pharmaceuticals, FMCGs and power do not get badly affected even in a depression. Some other funds invest in stocks of MNCs, while a few are based to benefit from the privatisation process by investing in public sector undertakings. Then, some funds invest in more than one sector. As a savvy investor, if you want to reap the benefits of changing business cycles or a play in multinationals or PSUs, these exotic funds could be an excellent option.

Universe of Speciality Funds

In India till now, the evolution of speciality funds has been driven more by the sweeping changing in the economic structure than by the changes in business cycle.

The first phase in Indian economy began in 1991-92 when the Indian economy went through structural changes the industrial licensing regime paved way for liberalisation leading to entry of foreign companies. The disinvestment drive was also started to privatise government-owned companies.

To benefit from the liberalisation process, UTI Master Growth the first speciality fund was launched in February 1993. Its theme: flexibility to invest up to 50 per cent of the assets in PSU stocks, a novelty at that time. A year later, exports became the key thrust area in five-year plans, and Canbank Mutual Fund launched CanExpo to invest in export-oriented units and companies with forex earnings.

The second phase began in 1998, when the trickle-down effect of liberalisation became visible. Multinational companies came in the limelight as they were managed well and were focused on results. A lot of them were also in the fast moving consumer goods industry, which was doing well as Indians were consuming more. Some private sector mutual funds had completed a few years in business and were settled. This period brought innovative ideas such as MNC funds from a few fund houses, funds favouring out-of flavour stocks such as SBI Magnum Contra, or the ones carrying the cyclical theme such as Alliance Basic Industries.

UTI, in a bid to break free from its staid image, launched three speciality funds— UTI MNC (erstwhile UGS 10000), UTI Brand Value and UTI Service Sector Fund. Sun F&C Resurgent India Equity fund brought another unique idea to the tableof catching companies on the verge of a turnaround, merger or restructuring. But not all investors could participate in this fund as the minimum investment still continues to be pegged at Rs 25,000, the highest investment minimum for equity funds. However, one category that is clicking now is the cyclical and old economy story. The reason: cyclical and old economy sectors such as basic engineering, automobiles, diversified are back in the limelight on stronger performance.

Should You Own It?

Indeed yes, variety is the spice of life and you have many options here. But first assess whether you need them or not. Your current portfolio of stocks and mutual funds may already be spread across the same sectors that you wish your speciality fund to invest in. If that is not the case and you are confident about the prospects of a theme, you can take a call. But then remember that these funds should have a supplementary role in your portfolio and form a small part of your portfolio (around 10-15 per cent) and some of theses may just be suited as an opportunistic avenue than a long-term investment.

The writer is the chief executive of a leading mutual fund tracker ValueResearchOnline.