Investing in 2012: What mutual funds are cheering & jeering

What mutual funds are cheering & jeering. Clearly, with the slowdown being more pronounced, domestic mutual funds have become more cautious. They are playing it safe, and cherry-picking stocks that are throwing up healthy numbers on their balance sheets and dropping the ones that have taken a hit. ET Intelligence Group finds out what MFs are bullish on. Also, check out the top five winners and our top picks for the year ahead

CEMENT

With infrastructure cos on slow track, some fund managers have found a way to participate in the infrastructure theme – cement cos with strong balance sheets and high dividend yields. The shareholding of MFs in ACC has shot up by 113 bps, while in Ambuja Cements, it has gone up by 49 bps since December last. However, one-time favourite Shree Cement lost favour with the fund managers probably on account of higher valuations.

WHAT’S IN: ACC, Ambuja Cements

WHAT’S OUT: Shree Cement

CAPITAL GOODS

Domestic mutual funds are shedding stocks of capital goods companies in the face of policy paralysis and a slowdown in investment. The fund houses are also worried that these companies lack visibility on earnings growth in the near term. The shareholding of mutual funds in L&T, for instance, has declined by 145 basis points (bps) in the past one year; in Siemens by 324 bps; in Thermax by 437 bps; in Voltas by 465 bps; and in BHEL by 48 bps. Some fund managers are also concerned about the sustainability of the order book of companies like BHEL and L&T, and perturbed by the fact that margins of capital goods companies are likely to be strained as pricing pressure mounts.

WHAT’S IN: BEML, Elecon Engineering

WHAT’S OUT: L&T, Siemens, Voltas, BHEL

AUTOMOBILES

What has caught the fancy of local fund managers are two-wheeler companies. The holdings of mutual funds in Bajaj Auto have risen by 61 bps, and in Hero Motocorp by 41 bps since December last year. Given their strong balance sheets and return on capital (ROC), fund managers are anticipating decent growth from these companies over the next few months. In fact, for some fund managers, these companies are a substitute for FMCG counters, ensuring similar kind of earnings growth but at reasonable valuations.

WHAT’S IN: Bajaj Auto, Hero Motocorp

WHAT’S OUT: Mahindra & Mahindra

FMCG

Not many fund mangers appeared comfortable investing in FMCG counter this year because of valuations which appear stretched. Those who did, justify their stance as paying premium for future earnings growth. The shareholding of mutual funds in top FMCG companies therefore saw a modest growth in 2011. It rose by 39 bps in ITC, and just about 6 bps in HUL and Nestle. One of the red-hot stocks with fund managers last year, Jubilant Food works, however, saw a massive dip of 831 bps in MF shareholding in the past one year. The stock had run up more than 81% during the year but has corrected since then.

WHAT’S IN: ITC, Godrej Consumer Products

WHAT’S OUT: Jubilant Food, Dabur India

FINANCIAL SERVICES

Cheap valuations in this sector have prompted some fund managers to increase their stake, especially in non-banking financial companies (NBFC’s) as asset quality is not much of an issue with these companies as is the case with banks. The shareholding of mutual funds in LIC Housing Finance rose 477 bps, while in Power Finance Corporation (PFC) it is up by 455 bps. Some of the private sector banks with retail focus have also caught the fancy of fund managers. These include Axis Bank and Karur Vysya Bank.

WHAT’S IN: IDBI Bank, Axis Bank, Karur Vysya Bank, LIC Housing

WHAT’S OUT: Union Bank, Shriram Transport Finance, Allahabad Bank