Key Points:
• Infrastructure funds in India are overweight in two sectors viz. Industrial Materials (having an average allocation of 41.70% as of Aug 2010) and Financial Services (having an average allocation of 19.12% as of Aug 2010).
• The assets growth of infrastructure funds has not kept pace with rise in markets, indicating that there have been net outflows from these funds so far this year.
• The total assets of all infrastructure funds has dropped by about 11% this year (till the end of August 2010), even though the BSE Sensex index and the infrastructure funds category has delivered returns of 3.62% and 5.97% respectively over the same period.
• Infrastructure funds have delivered a lackluster performance in the past one year (as of September 2010), with the category delivering an average return of 16.44%, compared to an average return of 26.90% delivered by all diversified equity funds and a 18.61% return delivered by the Nifty Index over the same period.
• Among the largest five infrastructure funds in India, the key underperformers over the past one year have been UTI Infrastructure Advantage Ser I Gr (+7.70%), UTI Infrastructure Gr (+9.04%) and ICICI Prudential Infrastructure Gr (+15.28%).
• The top performing infrastructure fund over one year period (as of September 2010) is HDFC Infrastructure Fund Gr, which has returned 29.42%. The second largest infrastructure related fund in India viz. DSP BlackRock India Tiger Gr has also managed to perform well over the past one year delivering a return of 22.90% (and ranking in the third spot).
• Performance Attribution analysis points to Industrial Materials, Energy and Utilities sectors as the main culprits for underperformance of infrastructure funds over the past one year.
• Over a one year period (as of September 2010), the BSE 100 index has delivered a return of 19.00%, whereas the BSE Capital Goods, BSE Oil & Gas and BSE Power indices have returned 16.27%, -0.27% and 5.17% respectively over the same period.
Infrastructure gets a massive push in India
Infrastructure seems to be the new buzzword doing the rounds of markets these days. Thanks to the various advertising campaigns, and frequent mention of Indian infrastructure in press and other media, a young kid will probably now be able to relate to the word, if not fully understand it. There is no doubt that infrastructure in India needs to be ramped up considerably, and there have been many reports citing that poor infrastructure in India is one of the key reasons for the country not achieving double digit GDP growth rates on a more consistent basis.
The Indian government plans to double the spending on infrastructure to US$1 trillion in its next five year plan, which runs from year 2012-17. It also announced plans to roll out a US$ 11 billion debt fund by next year, as part of its massive push to the infrastructure sector. Meanwhile, as per news reports, the World Bank is also expected to lend around US$ 15 billion – US$ 20 billion to India's infrastructure sector in the next five years. The Indian government is also trying to let domestic investors participate in the Indian infrastructure story, by announcing a separate Rs. 20,000 exemption for investments in infrastructure bonds in this year’s Union Budget held in February 2010. These bonds will have a minimum tenure of ten years and a lock-in of five years for investors.
Infrastructure funds in India and their sector allocation
In the mutual fund domain, the industry has launched several infrastructure funds that invest in stocks of companies related to the infrastructure space. As of September 2010, there are about 22 infrastructure related funds in India. These funds not only invest in stocks of companies engaged in the infrastructure business but various ancillary industries like banking & financial services, energy, utilities, and some even have exposure to sectors like media and consumer goods. Thus the investment universe of these funds is quite diversified. Interestingly enough the recently launched CNX Infrastructure index by the National Stock Exchange, doesn’t include any banking or financials stocks in the index. However it can be seen that the infrastructure funds in India maintain a high allocation to banking & financial stocks, and at the end of August 2010 the average allocation to this sector was 19.12%, making it the second most popular sector among these funds in India. The most popular sector amongst infrastructure funds in India is clearly ‘Industrial Materials’, which has an average allocation of 41.70% as of August 2010. Refer to Figure 1 for the sectoral allocation of Infrastructure funds in India.
Assets growth of Infrastructure funds have not kept pace with markets
The assets under management (AUM) of infrastructure funds in India have not kept pace with rise in markets, indicating that there have actually been net outflows from infrastructure funds so far this year. A point to note is that the AUM of every infrastructure fund in India at the end of August 2010 is lower than the AUM at the end of year 2009, even though the BSE Sensex index has gone up by 3.62%, and infrastructure funds have delivered an average return of 5.97% over the same period. The total assets of all infrastructure funds stood at Rs. 21,896 crores (or 12.53% of industry equity AUM) at the end of 2009, and it fell to Rs. 19,486 crores (or 10.87% of industry equity AUM) at the end of August 2010, making it a fall of about 11%. If you dig deeper, it can be seen that the AUM of the five largest infrastructure funds in India has fallen by 10% to 23% since the end of 2009. Refer to Figure 2 for asset trends of Infrastructure funds in India.
Infrastructure funds deliver a lackluster performance in the past one year
Infrastructure funds have turned in a lackluster performance in the past one year, with the category delivering an average return of 16.44% over a one year period (as of September 2010), compared to an average return of 26.90% delivered by all diversified equity funds (includes all large cap and small & mid cap funds), and a 18.61% return delivered by the Nifty Index over the same period. Over a three year period (as of September 2010) too, infrastructure funds have not fared too well, but have managed to outperform other diversified equity funds and the key indices over a five year period.
Among the largest five infrastructure funds in India, the key underperformers over the past one year have been UTI Infrastructure Advantage Ser I Gr (+7.70%), UTI Infrastructure Gr (+9.04%) and ICICI Prudential Infrastructure Gr (+15.28%). Among them ICICI Prudential Infrastructure Gr is the largest infrastructure fund in the country with assets of Rs. 3,753 crores at the end of August 2010. The fund is a bottom quartile performer in calendar year 2009, and YTD in 2010, but has been a top quartile performer in years 2006 and 2007. This Morningstar three-star rated fund is however the top performing infrastructure fund over a three year period and five year period (as of September 2010).
The top performing infrastructure fund over one year period (as of September 2010) is HDFC Infrastructure Fund Gr, which has returned 29.42% and is also the best performing infrastructure fund over 3 months, 6 months and YTD. The second largest infrastructure fund in India viz. DSP BlackRock India Tiger Gr (with assets of Rs. 3,068 crores as of August 2010) has also managed to perform well over the past one year, delivering a return of 22.90% (and ranking in the third spot among other infrastructure funds). This Morningstar three-star rated fund has been a top quartile performer in calendar years 2006 and 2007, and a second quartile performer in calendar year 2009 and YTD in 2010. Refer to Figure 3 for performance of Infrastructure funds in India.
Performance Attribution analysis points to Industrial Materials, Energy and Utilities sectors as the main culprits
The performance attribution analysis of these infrastructure funds points to the high exposure to Industrial Materials, Energy and Utilities sectors, as the main cause for the underperformance of these funds over a one year period. The average allocation of these funds to the Industrial Materials sector at the end of August 2010 is 41.70% compared to an allocation of about 25% in both the BSE Sensex and Nifty indices respectively. Meanwhile the average allocation of these funds in the Energy and Utilities sectors are 14.77% and 11.46% respectively as of August 2010. Industrial materials include companies that provide or manufacture chemicals, machinery, building materials and commodities. Thus a suitable benchmark index for this sector would be the BSE Capital Goods index. For the Energy and Utilities sectors the suitable benchmark indices would be BSE Oil & Gas index and BSE Power index respectively. Over a one year period (as of September 2010), the BSE 100 index has delivered a return of 19.00%, whereas the BSE Capital Goods, BSE Oil & Gas and BSE Power indices have returned 16.27%, -0.27% and 5.17% respectively over the same period.
We dig deeper into the attribution analysis of the largest infrastructure fund in India, called ICICI Prudential Infrastructure, to determine why it has been an underperformer over the past one year. Figure 4 highlights the attribution analysis of ICICI Prudential Infrastructure Fund versus the BSE 100 index over a one year period (as of September 2010). The chart implies that it is the overweight exposure in Energy and Telecom sectors (when compared to BSE 100 index), that has primarily contributed to the underperformance of the fund. If we look further, the energy sector has delivered an overall return of 3.38% in the portfolio over the last one year, whereas the telecom sector allocation in the portfolio has returned -11.70% over the same period. Within the industrial materials sector, allocation to metals and mining stocks like Sterlite Industries (which has about 5% allocation in the portfolio in September 2010) has also hurt the performance of the fund significantly. Meanwhile, higher allocation to financial services sector has paid off well for the fund, with the sector performing very well over the last one year.
Conclusion:
There is little doubt on the scope or potential of the infrastructure space within India, owing to the massive push to this sector from the government and also now from foreign agencies. Even though the infrastructure stocks and funds may have underperformed in the past one year, their long term performance is still quite robust, and so is their potential in the upcoming years. Probably this is what the various infrastructure funds in the market have been pitching for, amongst the buzz related to them in recent times.
