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N Mahalakshmi
Kothari Pioneer AMC has launched the first domestic fund dedicated to the information technology sector. Christened Kothari Pioneer Infotech Fund, the fund seeks long term capital appreciation primarily through investment in information technology sector. The fund will be almost fully invested in infotech stocks and on occasions maintain high liquidity with investments in money markets. The fund can also invest upto a maximum of 30 per cent of its corpus in overseas markets, as and when permission is granted from regulatory authorities.
The fund will be managed by a team of chief investment officer, Ravi Mehrotra, R Sukumar and K N Siva Subramanian. The initial public offer is open till August 22, 1998 and the fund will be available for continuous sale and repurchase from September 14, 1998.
KP Infotech Fund will be actively managed, and assume defensive or aggressive position on infotech stocks depending on opportunities available at various points of time. On defensive consideration, the scheme may Kothari Pioneer AMC has launched the first domestic fund dedicated to the information technology sector. Christened Kothari Pioneer Infotech Fund, the fund seeks long term capital appreciation primarily through investment in information technology sector. The fund will be almost fully invested in infotech stocks and on occasions maintain high liquidity with investments in money markets. The fund can also invest upto a maximum of 30 per cent of its corpus in overseas markets, as and when permission is granted from regulatory authorities.
The fund will be managed by a team of chief investment officer, Ravi Mehrotra, R Sukumar and K N Siva Subramanian. The initial public offer is open till August 22, 1998 and the fund will be available for continuous sale and repurchase from September 14, 1998.
KP Infotech Fund will be actively managed, and assume defensive or aggressive position on infotech stocks depending on opportunities available at various points of time. On defensive consideration, the scheme mayinvest substantially in money market instruments.
The portfolio turnover is expected to be between 50 and 100 per cent. The fund manager plans to invest a substantial portion on the portfolio in large companies which have a focus on value added segments of this industry which deliver high margins.
Investments will also be made in smaller companies, which have a good chance of emerging as bluechips.
The Indian IT Sector
Within a short span of less than a decade, the Indian IT sector has emerged globally competitive. Indian software companies have witnessed a spectacular growth by leveraging on core competitive advantages. The accelerated growth pace of these companies has translated into equally dramatic market performance.
Since January 1997, eight IT sector companies have registered an average price appreciation of nearly 465 per cent against a a mere 5 per cent growth in BSE Sensex. While out performance is likely to slacken over time, the IT sector is expected to continue to outpace themarket. In the past five years, the software exports has been growing at an annual rate of 55 per cent. In the next two years, the sector is expected to show an annualised growth earnings of nearly 40 per cent compared with 13 per cent in BSE Sensex companies. The average return on equity for the top ten companies hovers around 30 per cent compared with an average of 17.6 per cent for BSE 30 companies.
Since high earnings growth is on a fairly large revenue base, the growth looks sustainable. The high price earning multiple these companies command is on account of high growth in revenue and profit.
The reason behind the stellar performance of this sector is not far to seek. Indian IT companies are competitive software service suppliers in the world. Their core competitive advantage is the highly competent English speaking software personnel available at one-fifth the cost of their western counterparts for equal quality of output.
Many of the top Indian software companies are working on the latestplatform and their quality of service is much higher than competitors in China, Philippines and Eastern Europe.
Indian Software companies are insulated from any recession in the domestic industry as over 90 per cent of their revenue is from export to western countries. Apart from volume growth in exports, depreciation of rupee will further enhance profitability. Government measures to provide tax-incentives and preferential treatment for this sector is expected to accelerate growth further.
However, the sector has some inherent disadvantages. Most companies are absolutely dependent on western technology. There is little original R&D in software development and only handful of companies have any product development base. Despite large pool of professionals, there is a demand supply gap which is leading to spiralling manpower costs in the Indian IT industry. If this gap persists, it can adversely affect the profitability of the firms. Importantly, this industry faces continuous technological changes andfailure to adopt these changes will mean winding up of shops.
In the past one and a half years, the infotech sector has been the most fancied on the bourses. Not surprisingly, these have found favour with a number of fund managers as well. Top rankers in the equity segment have been those with high stakes in infotech scrips. Birla Advantage, which has emerged as a top performer in the past three years has nearly 40 per cent of its total assets in four infotech scrips. The top performer in the last one year, KP Bluechip fund has a 32 per cent exposure to this segment. In fact, helped by gains in this sector, funds from Apple Mutual Fund and 20th Century Mutual fund have witnessed a turnaround.
The only other Infotech Sector fund is the offshore fund launched by UTI in July, 1997. The fund garnered Rs 180 crore. There is no clue on either the performance of the fund or its portfolio.
In the domestic segment, JM Basic is the only other sector specific fund. JM Basic Fund, a fifteen year closed-end fundlaunched in April, 1997 is dedicated to the petrochemical sector. In the brief period since launch the fund has been an average performer.
In the light of the growth potential of the information technology sector, Kothari IT fund should perform well.
The right mix of industry leaders and emerging winners will hold the key to the fund's performance. Fund managers at Kothari Pioneer have been aggressive investors in this sector ever since its potential was recognised by the market and have been great beneficiaries of the spurt in prices of IT scrips.
The experience of fund managers should work in favour of the fund.
Despite all the merits of the infotech sector, the fund will have an inherent risk - being a narrowly focused sectoral fund, it can not provide broad diversification. The fund will have a tendency to be more volatile than a more broadly diversified portfolio. However, investment in sectoral funds is the ideal way to take exposure to an industry that one is optimistic about.
While exposureto one particular stock will mean company specific risk, formulating a diversified sectoral portfolio will be prohibitively expensive. A sectoral fund provides diversification within the chosen group and hence minimise company specific risk.
Today, a diversified IT portfolio will cost atleast Rs 7 lakh. In the infotech fund, however, an investor can participate by investing an amount as low as Rs 2000.
Also being an open-end fund, the fund offers almost instant liquidity and the investor can offload his position the moment he expects a change in outlook. However, sectoral funds do not complete any investment programme and should be held along with other broadly diversified portfolios.
Kothari Pioneer Infotech Fund is the ideal vehicle for retail investors convinced with the Indian IT story. However, investors allergic to high volatility should give it a pass.
-- Value Research
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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