Banking funds: jumping jacks

Getting focussed

Let’s look at the individual players.

Reliance Banking’s one-year return till August 22 stood at 51.3% while UTI Banking’s was 44.54%. Reliance Banking has consistently scored over UTI Banking in terms of returns. Year-till-date returns (till August 22) of both the funds differ by a wide margin. While Reliance’s stood at 22.73%, UTI was far behind at 9%.

The reasons for such disproportionate returns are not too difficult to fathom. Reliance Banking always keeps some amount of cash handy in order to buy cheap. What is interesting is that from 4.8% in April 2007, the cash component increased to over 20% in July 2007. Naturally this leaves one wondering if the fund mangers pre-empted the market fall. In contrast, UTI Banking spent all of its cash in June and July. From less than 1% of its AUM in cash in April 2007, the cash component rose to 13.5% in May and dropped to 8.5% in June. By July, the cash allocation was down to nil.

Besides their cash allocations, another difference is in their investing style. Of late, Reliance Banking has been taking an aggressive stance. The share of large-cap companies, which was 50% in May, is now just above 33%. The fund has offloaded large-caps in favour of mid-cap companies. UTI is doing just the opposite. It had been collecting large-caps, reducing holdings in mid-caps and dumping the small-cap companies along the way. In fact, the share of the large-cap companies in UTI Banking is around 80%.

Among the prominent stocks, both the funds have been holding State Bank of India (SBI) and ICICI Bank for quite a while. SBI is the top holding of Reliance Banking with 16.5% of its corpus invested in it. ICICI Bank is the top holding of UTI Banking with around 25% of its AUM in it. While both stocks have been great performers, Reliance Banking scored because SBI rose by over 75% in one year while the corresponding figure for ICICI Bank was just 47%. Reliance Banking’s pick of Federal Bank also proved rewarding since the stock surged over 71% in a year. UTI Banking got lucky with Axis Bank (earlier called UTI Bank) which gave a return of over 82% in a year.

The stark similarity between the two funds is that both maintain very concentrated portfolios of around 15-17 stocks. Though primarily invested in banking and financial services sectors, both have ventured to make investments outside this ambit. While Reliance Banking added technology company India Infoline (an online trading player) in its portfolio in July, UTI took a call in the services sector and bought Power Finance Corporation for the first time in the same month.

The index option

Banking BeES from Benchmark Mutual Fund is a banking dedicated sector fund. Being an exchange traded fund (ETF), it forms part of the index funds category. Though the fund’s AUM has fluctuated very widely, its assets have grown steadily after March this year. From Rs 3,300 crore (March 2007), the fund has doubled its AUM to Rs 6,439 crore (July 2007). To reiterate that investors in banking funds have been rewarded handsomely, consider the returns of this fund.

With a 41% return, Banking BeES has been the top return generator among the index funds in the one-year period ended August 22, 2007. In the three-year period also, the fund is among the top three in its category. However, bear in mind that despite the highs, the fund has witnessed steep falls during market corrections. This could unnerve many investors.

For instance, in the June 2007 quarter, the fund delivered 28%, much more than the category’s 13.72%. Yet, a year ago (June 2006 quarter), the fund was down around 20% when the category’s loss was just 7%. This was repeated in March 2007 when the fund fell around 20%, while the category’s loss was restricted to just 5%. Interestingly, FIIs are taking the ETF route to invest in the banking sector in India since there are restrictions on them picking up a stake in Indian banks.

Interest galore

The Indian banking sector is witnessing a fair amount of interest and activity. There will be a lot of consolidation in the banking sector in 2009 and foreign players will have lot more access.

As of now, banking stocks are doing well and consequently, so are banking funds. In fact, the financial sector (which includes banking) is the third most preferred sector among the equity funds after technology and basic/engineering. Equity funds have been increasing their investments in this sector steadily since December last year. Maybe it’s time you checked if you have sufficient exposure to banking stocks.

?The author is CEO, Value Research