Tata Mutual Fund announced the launch of Tata Business Cycle Fund. This would be an open-ended equity scheme following business cycles based investing theme.Â
The New Fund Offer (NFO) opens on July 16, 2021 and will close on July 30, 2021. In this niche category, there are already ICICI Prudential Business Cycle Fund and L&T Business Cycles Fund.Â
Let us find out more.
Business cycles
The economy goes through a series of stages as it expands and contracts, characterised by downward or upward fluctuations of GDP.
Periods of growth result in business activity rising, where businesses innovate, produce new products, create jobs and invest in further growth. At the peak of the expansion phase, businesses are using their full capacity, and soon continued innovation and investments have lower impact.
Periods of slowdown give businesses the opportunity to reorganise their operations and rebuild for future growth. Businesses cut down on products and capacity and follow a more focused approach in their day to day functioning. At the trough of the slowdown phase, these renewed business models give rise to increased capacity and innovation.
Investing through cycles
The returns investors achieve on their investments are driven in large part by changes in the business cycle. Each phase in the business cycle presents unique investment opportunities. So, incorporating business cycles theme into investments helps make the most of the current economic environment.
During a phase of recovery and expansion, investments that are more sensitive to faster economic growth and business activity are likely outperform. There are generally referred to as cyclical stocks. These include stocks of midsize and small companies, as well as emerging market equities and younger, growth-oriented firms and industries.
During a phase of slowdown and recession, defensive investments and those that are sensitive to falling interest rates have greater potential to outperform. There are generally referred to as defensive stocks. These include Stocks of larger and stable companies and Businesses that experience steady consumer demand even during economic slowdowns.
Why now
Business cycles are becoming shorter. With the duration of business cycles shortened, a fund that changes its approach in sync with change in cycle is key.
Sector allocations are having a large impact. Over the last few years, the impact of sector allocations has been greater on alpha generation versus stock level allocations.
How different from other funds
Compared to other diversified funds, the business cycles theme allows for greater sector concentration in terms of sector over/underweight.
The other portfolio parameters like portfolio churn, market cap allocation, number of stocks will depend on the stage of the economic cycle.
To get an understanding of how existing business cycle funds are positioned, let us look at these:
For instance, L&T Business Cycle Fund’s biggest sector bets today are Construction, Financials, Engineering, Metals and Chemicals. The recently launched ICICI Prudential Business Cycle Fund’s top sector bets are Financials, Energy, Construction, Automobiles and Communications. While some sector bets are common, there is a perceptible difference.
Other NFO details
Fund Manager – Rahul Singh, Venkat Samala (Overseas Investment) and Murthy Nagarajan (Debt Portfolio)
Benchmark – Nifty 500 TRI
Minimum Investment – Rs 5,000
Exit Load – Redemption/Switch-out/SWP/STP by expiry of 365 days from allotment: If the withdrawal amount or switched out amount is not over 12% of the original cost of investment, exit load will be 0. If it is over 12% of the original cost of investment, exit load will be 1% of applicable NAV.
Fund house speak
Rahul Singh, CIO – Equities at Tata Asset Management said that, “The focus has shifted to Business cycles investing because of 2 reasons. Cycles which earlier lasted 4-5 years have now shortened to 1-2 years. Over the last few years, the impact of top-down sector allocations has been on alpha generation which has been very high. This fund would invest in businesses on a macro basis, with at least 80% of the portfolio invested as per Business Cycles theme.”
