Finance News

Auto Funds: slowing down?

The Indian mutual fund arena is made up of around 30 fund categories. While most of the categories comprise numerous mutual funds, there's one category that is made up of only two funds. UTI Transportation and Logistics and JM Auto Sector are the only two auto sector-dedicated funds in India. And their lack of company is not without reason.

The Indian auto sector hasn't been doing well of late and predictably, the two auto funds have been letdowns for investors as well. The auto funds category has been the worst performing category of equity funds after the technology funds category. The category lost 10% during the one-year period ending May 12, 2008. Their returns were even lower than the debt and liquid funds.

While the two funds are similar in their dismal performances, they are quite different with their strategies. UTI Transportation and Logistics likes to have a portfolio of around 15-20 shares, while JM Auto Sector is far more aggressive with only 12-15 shares. This is a clear departure from the funds' earlier stance. When UTI Transportation and Logistics started out, it had around 30 shares in its portfolio, while JM Auto Sector had about 20-25 even a year after its launch. Both the funds have now pared the number of shares in their portfolio.

In its first year of its operation, UTI Transportation and Logistics looked like it had all the makings of a category buster. The fund rose more than its benchmark (BSE Auto) and lost less than the index in a downturn. But the dream run was short lived once the fund manager quit in October 2005. But even without the frequent management changes, UTI Transportation and Logistics had never managed to rank up to its peer. JM Auto Sector has beaten UTI Transportation and Logistics every time, sometimes very convincingly.

For example, in 2007 when the auto sector was facing difficult times due to high inflation, high interest rates, and credit squeeze, JM Auto Sector was still able to generate returns of 17% compared to UTI Transportation and Logistics's loss of 0.96%. In the December 2007 quarter, UTI Transportation and Logistics's returns were 9% compared to JM Auto's 17%, though it did beat the BSE Auto's 6% return during this period. However, in the recent stock markets crash, JM Auto suffered its biggest fall in a month. The fund was down by around 20% in January 2008. Compared to this, UTI Transportation and Logistics lost 17% in January 2008.

Needless to say, as the name of the two funds suggest, a majority of their assets are invested in the automobile and related sectors. The funds' investments in other sectors like basic/engineering and metal and metal products is also in companies related with the auto sector. For example, companies like Exide Industries, Enkei Castalloy, Castrol, Timken India are all related to the auto sector where the funds have also invested.

Though both the funds are small in size, UTI Transportation and Logistics is four times bigger than JM Auto Sector. UTI Transportation and Logistics' assets have fallen from what it was when it started. Its assets under management was Rs 55 crore initially in April 2004, touched a high of around Rs 100 crore in April 2006 and is now at Rs 39 crore (at the end of April 2008). For JM Auto Sector, the assets have not fluctuated much from the start although they are less from the initial corpus. JM Auto had AUM of Rs 13 crore initially and fell to Rs 8.8 crore in July 2006. At the end of April 2008, its AUM was at Rs 11 crore. Regarding their cap preferences, JM Auto Sector leans towards small cap shares. In fact, mid- and small-caps account for 58% of its assets. However, the fund has also started adding large cap stocks in its kitty after the new fund manager Asit Bhandarker took over in July 2007.

Unlike JM Auto Sector, UTI Transportation and Logistics is more of a large-cap player. During its initial years the fund leaned more towards pure mid- and small-cap companies. However, the fund spotted the large-cap rally in time and began moving towards large-cap companies by March 2006. Large cap companies account for account for nearly 50% of its portfolio with shares like Tata Motors, Mahindra & Mahindra, Maruti Suzuki India, etc.

Though the auto sector has faced tough periods in the recent past, the sale of automobiles, particularly cars, can grow due to the rising income levels and peaking of interest rates. The reduction in excise duty on cars in the Budget can also boost the sagging sales of cars.

Those who truly believe in the resurgence of the auto sector could give these two funds a look.

The author is CEO, Value Research