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Have domestic equity funds really given up altogether on IT stocks?

That the software sector is struggling is old news. One mutual fund house expanded the scope of its IT fund, while another plans to merge its technology fund with a diversified fund.

Earlier this year, equity funds had still seen some promise in the sector. A good number of largecap funds were still overweight on the software sector, compared with the Nifty100 and Nifty500 indices.

A steady and foreseeable growth, lower valuations, and expectation that companies were adapting strategies to cope with the changing dynamics held funds’ attention.

That enthusiasm appears to have dampened now. In the past couple of months, most largecap and diversified funds pared stakes and became underweight on the sector. Sebi data shows across all equity funds the share of software stocks stood at 6.7 per cent of the total AUM in May against 10.6 per cent in January, 2016. The sector has now ceded the second spot in terms of AUM share to NBFC and related finance stocks. The falling share is also a function of the software stocks’ worsening market performance, apart from fund action.

Going underweight
Largecap funds are wont to hold software stocks given that the sector makes up the second-highest holding in the indices after banking and the largecap universe features a good number of software stocks.

Given the growth hiccups for the sector, mutual funds would obviously have turned away from the sector. But the sector’s share in mutual fund portfolios has not been an unbroken march downwards.

While mutual funds did begin to reduce stake in mid-2016, several largecap funds moved back to picking up software stocks in late 2016 post the US elections.

Those valuations were lower, especially after the market fall, and concerns seemed overdone, which could have prompted funds to pick up stake. They have now turned around and cut back. Most funds now at best maintain portfolio weight at the same level, as software has in the Nifty100, if not below it.

Until February 2017, about half the 50-odd largecap funds had exposure to the software sector at levels above that of the Nifty100 index. The index weight has been around 10-13 per cent in last one year. By the time April and May, 2017, rolled around, only two of every 10 funds held software shares at levels above that of the index.

On an average, funds had 8.7 per cent exposure to the sector in May 2017, against the 12.4 per cent in the previous May. Even contrarian and value-oriented funds cut holdings as March quarter earnings showed continued pressure on the numbers, and post the various bonus and buyback bonanzas.

For diversified or multicap funds, already very few of them have been overweight on the sector compared with that in the Nifty500 index. As funds could take a sizeable proportion of midcap stocks, there would be a lesser need to invest in large software companies.
As with largecap funds, the last quarter of 2016 and early 2017 saw diversified funds raise stakes only to pare them back in the past couple of months.
Until March 2017, about one-third of the 56 funds in the universe had held more than the 9-12 per cent software stocks compared with what the Nifty500 has. As of May, 2017, two of every 10 funds were overweight on the sector.

 

(Bhavana Acharya is a Mutual Funds Analyst at FundsIndia.com. Views expressed in this column are her own and do not represent those of ETMarkets.com)