Business and economic cycles offer numerous investment opportunities. Investing in companies in their expansion phase can lead to significant wealth creation. Recently, the New Fund Offer (NFO) for Sundaram Business Cycle Fund was launched. Currently, 12 schemes under this theme manage assets worth Rs 25,775.8 crore.
“Sundaram Business Cycle Fund aims to generate alpha by picking beneficiaries of structural changes in the economy that are driven by specific themes,” says Sunil Subramaniam, managing director at Sundaram Mutual Fund.
What the Business Cycle Fund offers
A business cycle has four phases: expansion, peak, contraction, and trough. Within an industry, companies may be in different phases of their business cycle. Companies in the expansion phase or those coming out of a recession and with reasonable valuations may be good investments.
“Business cycles refer to economy-wide fluctuations in production, trade and overall economic activity. Business cycles typically involve alternating periods of expansion and contraction, and these sequences of events repeat themselves,” says Harish Krishnan, co-chief investment officer and head of equities at Aditya Birla Sun Life Asset Management Company (AMC).
The Business Cycle Fund invests in themes that are expected to perform well in the medium to long term, such as digital business, consumption premiumization, and urbanization.
They operate on the premise of identifying the current stage of the economic cycle and adjusting their portfolio accordingly. “During periods of expansion, they focus on cyclical sectors such as financials, consumer spending and the industrial sector, while during periods of contraction, they encourage a shift towards defensive sectors such as healthcare and technology. This dynamic strategy allows fund managers to capture opportunities and mitigate risks associated with changing economic conditions,” says Chintan Haria, principal investment strategist, ICICI Prudential AMC.
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The promise of higher returns
These schemes invest in businesses of all sizes, are actively managed and can be used across all sectors.
“These funds have well-diversified portfolios and flexible approaches that help them leverage opportunities and manage risks across market caps, themes and sectors at different stages of the business cycle. Hence, investors have the potential to achieve superior risk-adjusted returns over the long term,” says Haria.
High-risk bets
These are thematic schemes that focus on specific sectors and may underperform if the investment thesis proves wrong or the business cycle unfolds longer than expected.
“Business cycle funds tend to invest aggressively in particular sectors and may have a higher allocation to mid-cap and small-cap stocks. Since they have a higher concentration in a particular sector, they may experience higher volatility compared to, say, a pure large-cap fund or a flexi-cap fund,” says Krishnan.
“In the near term, these funds may underperform their benchmarks as their value creation potential may not become apparent to the broader market until later stages,” Subramaniam said.
Barring the HSBC Business Cycle Fund, other schemes have a limited track record.
For experienced investors
These funds are aimed at experienced investors who are willing to take on additional risk and have an investment horizon of at least five years. Invest using a systematic investment plan and a systematic transfer plan.
Limit your exposure to these thematic investments to 5-10 percent of your portfolio.
First Edition: June 13, 2024 | 9:50 PM IST
