business cycle fund, as the name suggests, profit is going to come from the timing of the business cycle. This means that funds tend to outperform by buying cyclical sectors during recessions and increasing defensive ones. Another variant of this category is a fund that can pick companies at the right time in their life-cycle (early stage, middle or mature). However, reality does not bear this promise. Most business cycle funds are too old lately to have a meaningful track record, and one that has a long record has failed to outperform the S&P BSE 500.
These Fund Stocks, despite their perceived sector focus, are not very focused in terms of sectors, and there is little evidence of them being able to make sectoral switches at the right time. Such funds have higher expense ratios than diversified flexi-cap funds (which are generally larger) and this could be the main reason why AMCs are keen to launch them.
The oldest fund in this category is L&T Business Cycle Fund, which was launched in 2014 on the expectation of economic recovery. “The idea was to eliminate 100% cyclical play and defensive,” Venugopal Manghat, Head, Equities, L&T Mutual Fund told Mint. The strategy played out during the bull runs of 2015 and 2017, but failed spectacularly in the stagnant markets during 2018 and 2019. In the calendar year 2020, its poor performance was striking. The fund gave just 9.32%, compared to the S&P BSE 500’s 18.41%. This is because when the wheel turned it never moved from cyclic to defensive.
Manghat says the fund has not gone into sectors such as consumer staples, IT and pharma in nearly eight years of its existence as ‘the economic volatility continues’. “We don’t believe in playing a 1-2 year slowdown,” Manghat said. Overall, L&T Business Cycle Fund has given a CAGR of 11.74% (as on 9 September 2022) since inception, which is lower than 12.95%. S&P BSE 500.
The other four schemes in this category are more recent obsolete. ICICI Prudential AMC started its planning in early 2021, a time that proved to be a contingency. The fund has given 20.98% since launch, compared to 18.49% on the S&P BSE 500 (as of 9 September 2022). The fund counts financial, energy, automobile, construction and healthcare as its top five sectors. The fund’s manager, Anish Tawakale, told Mint that the overall deviation from the index would be more than 50% and there could be many sectors and industries where it would have zero weighting. ICICI Prudential Business Cycle Fund had earlier invested in metals, but has been avoiding FMCG, metals and unsecured consumer loans. According to Tawakale, the plan was able to catch the auto sector at the bottom of its cycle.
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Later in 2021, three other funds were launched under this theme: Tata Business Cycle Fund, Baroda BNP Paribas Business Cycle Fund in August and September 2021 respectively, and Aditya Birla Sun Life Business Cycle Fund in December 2021. was it a good time? 2021 was marked by a sharp rebound from Covid-19 lows and was fueled by loose monetary policy in the US and elsewhere, and the situation was reversed by a rise in inflation in 2022. Two out of three funds have posted lower returns, providing 4. Gains 5% since inception and failed to beat its benchmark. Tata Business Cycle Fund posted a gain of 12.10% since inception, almost similar to the S&P BSE 500 in the same period.
Kotak Business Cycle Fund is currently in the process of its New Fund Offer (NFO). According to Nilesh Shah, CEO, Kotak Mahindra Asset Management Company, the fund will be able to follow the strategy that was being followed by the erstwhile Kotak Select Focus Fund (now Kotak Flexi Cap), which was strong on high conviction areas. According to Shah, Kotak Flexi Cap is now forced to be large cap-oriented due to its size, such a strategy requires a fresh plan, a gap that Kotak Business Cycle Fund can now fill. According to Shah, companies can be in the early, middle or later stages of their development. The fund will seek to assemble a portfolio of companies at different stages in their life cycle, adopting a core and satellite approach—the main part trying to capture longer cycles, and the satellite trying to capture the smaller part. .
Experts in the personal finance sector are cautious about this category. They expect AMC’s existing diversified funds to keep the business cycle in mind. Thus a particular business cycle fund may simply be a copy of an existing fund, but with a higher expense ratio. A Mint analysis of portfolios of such funds shows high expense ratios and portfolios that are not much different from diversified funds of similar AMCs. “The portfolio of most actively managed funds is generally expected to align with business cycles, unless it is looking for price, contract or theme-specific play,” said Nirav Karkera, head of research at Fisdom. “L&T Business Cycle is the only fund with a track record of more than 5 years. This category has again performed well in the last one year but has underperformed in longer tenures (3 and 5 years). Considering the limited track record Looking back, we see that, over the past year Rupali Prabhu, CIO and Co-Head, Products and Solutions, Sanctum Asset.
“We feel that business cycle funds can be used to channelize overweight positions in favor of sectors in a better way,” he said. Diversified equity mutual funds reflect the views of the fund house’s sector over a period of time. In addition, diversified funds have been more consistent, enjoy a longer track record and offer a more comprehensive set of options. Business cycle funds still need to build a track record and highlight their ability to add value to a client’s portfolio. We currently prefer well-run diversified funds with a strong track record over business cycle funds. Without such a track record, a business cycle fund may simply buy out an existing fund at a higher cost.
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