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Thematic investing best bet during market volatility

Thematic investing best bet during market volatility
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Thematic investing best bet during market volatility

Highlights

Recognising which sector would do well and then allocating appropriately is very difficult

The last few weeks of this space has been concentrated upon identifying the various trends especially of the various sectors and take advantage by investing in them. I was also encouraging investors to create a core and satellite portfolio so that a bit of zing is added to the experience along with higher alpha. Particularly, while there's enough evidence against timing the markets, sectoral or thematic investing is all about that and specifically the exits. As these cycles happen over a short time spaced between long intervals. It's clear that these are cyclical with each sector playing at its own timing.

For instance, the current rally in metals has been after almost a decade and don't know how long would this last. The conditions of lower interest rates coupled with struggling US Dollar are a good recipe for a rally. Moreover, this time this is coupled with long investment neglect i.e. lack of capital expenditure (capex) in many mining sectors. The other important trigger, however, has been the pandemic induced lockdowns.

The stringent lockdowns across the geographies have disrupted the supply chains worsening the supply constraints. The quicker than anticipated recovery has stimulated the demand which only further exacerbated the gap. The surprising recovery hasn't been executed with apt resource allocations leaving the transition in disarray. This has resulted in the stocks rallying too wild in the last few months having businesses connected to metals and mining. These inconsistencies have been causing varying degree of price fluctuations with the demand-supply dynamics playing out. So, how could one take gain out of this situation!

The simple answer is to invest through various sectoral or thematic oriented funds available in the market. There are multiple funds targeting each of these segments like Pharma, Metals, Commodities, PSU, Consumerism, Banking & Financial Services, etc. As I'd earlier mentioned about the timing criticality in these funds, one may end up at a disadvantageous or even disastrous if the investor were to stay too long or too short in the investment.

Recognising which sector would do well and then allocating appropriately is very difficult, it requires not just mere timing but enormous amount of research and skill. One may foresee a certain sector to do well but what kind of allocation to be done so that it contributes a sizable wealth to the investor. More prominently when to reduce or exit a particular sector i.e., to identify the topping of a sector's performance is very hard.

For instance, in early 2018, with the Indian economy showing growth pangs, I realized that this could be the time to bet on defensive stocks or sectors like Pharma, IT and other export-oriented stocks as the global demand seems to remain intact along with continued appreciation of US dollar. Small allocations were made with this in mind, albeit, in a staggered manner over a period of one year. The indices of these sectors almost remained unchanged during this period doubting the conviction. It took another one year i.e., by early 2020 with the pandemic gaining pace, that these sectors began to perform well for the investors. Is it a case of too early entry or just got lucky despite having a devastating episode of once in our lifetime's event?

The other way is to invest through ICICI Prudential Thematic Advantage Fund of Fund. As the name suggests it's a feeder fund to other funds offered by them but exclusively invested in various other themes and sectors. This fund allocates across multiple other sectoral or thematic funds depending upon the discretion of the fund manager in the sole aim to benefit from the emerging themes at any given point of time. The allocation of this fund as on 31st Jan 2021 is across their India Opportunities fund, Infrastructure fund, Banking & Financial Services fund, Commodities fund and PHD (Pharma Healthcare and Diagnostics) with the remaining exposure to short-term debt.

More than one-third of the fund's exposure at that point was to India Opportunities fund which primarily looks for opportunities caused in the pricing due to policy changes, macro trends, etc.

Over a quarter of the fund was concentrated in Infrastructure fund, possibly to profit from any govt's announcements in the budget and another quarter of the fund was invested into Banking & Fin Services fund. That formed the bulk of the allocation. Compare this to the allocations a year earlier as on 31st Jan '20, Infrastructure fund had a lion's share with over 41 per cent, PHD at about a quarter of the allocation and India Opportunities fund at about another quarter.

The fund manager as deems suitable to the investment prospects tweaks the allocations across various funds in order to generate returns. Part of the satellite portfolio could be allocated into this fund to make higher returns; however, the risks are higher than any of the diversified equity funds.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at knk@wealocity.com)

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