The term ‘Business Cycle’ refers to the fluctuations of the economy between periods of expansion and contraction measured by various indicators like GDP growth, Index of Industrial Production (IIP), Interest rates, Inflation, and other macroeconomic variables.
Our economy generally experiences a continuous business cycle of four distinct phases such as recovery, growth, expansion and contraction. As an investor, you could aim to stay prepared to maximize your returns by strategically shifting your investments into sectors that may offer the best opportunities during each phase.
In order to achieve this, you may invest in mutual fund schemes that follow a business cycle theme, which monitors the macro-economic indicators to identify business cycle opportunities. It invests across sectors and stocks that are beneficiaries from the economic recovery and have high growth potential.
In the past few years, we have seen shorter business cycles due to impact of global and domestic macro-economic variables i.e. uncertainties of pandemic, policy changes, industry crisis, etc. The business cycles that earlier lasted for 4-5 years have now shortened to 1-2 years. Notably, the focus has shifted to business cycle investing, as this theme is combined with opportunities.
Such scheme with business cycle investing focuses on forward indicators rather than historical data. Based on this opportunities are identified well ahead on time. Investors aiming to benefit from the economic recovery over the next few years may consider investing in business cycle theme.
Looking at the aspects of economic recovery and the emerging opportunities through investment in business cycle theme, Baroda Mutual Fund has launched Baroda Business Cycle Fund. It is an open-ended equity scheme following the Business Cycle theme.
Table 1: Details of Baroda Business Cycle Fund
|Type||An open-ended equity scheme following the Business Cycles theme.||Category||Thematic Fund|
|Investment Objective||The investment objective of the Scheme is to generate long-term capital appreciation for investors by investing predominantly in equity and equity related securities with a focus on riding business cycles through dynamic allocation between various sectors and stocks at different stages of business cycles in the economy. However, there is no assurance that the investment objective of the Scheme will be achieved.|
|Min. Investment||Rs 5,000 and in multiples of Re 1 thereafter. Additional purchase Rs 1,000 and in multiples of Re 1 thereafter.||Face Value||Rs 10/- per unit|
|Entry Load||Not Applicable||Exit Load||
||Benchmark Index||BSE 500 TRI|
|Issue Opens||August 24, 2021||Issue Closes||September 06, 2021|
(Source: Scheme Information Document)
The investment strategy for Baroda Business Cycle Fund will be as follows:
Baroda Business Cycle Fund will predominantly invest in equity and equity related securities of companies domiciled in India or overseas. It will focus on riding business cycles through dynamic allocation between various sectors and stocks at different stages of business cycles in the economy.
The scheme aims to deploy the business cycle approach to investing by identifying such economic trends and investing in the sectors and stocks that are likely to outperform at any given stage of business cycle in the economy. At each stage of Economy/Business cycle, different sectors tend to outperform in terms of business performance, leading to superior returns on the bourses.
This investment strategy will monitor macro-economic indicators and identify business cycle opportunities for sector allocation. Here, the investments across sectors are not static in nature and are rotated based on the phase of business cycle.
The fund managers endeavour to identify the stage of the economy/business cycle and invest in sectors/stocks, which are likely to benefit from the same. Thus, it would combine Top-down view with bottom-up stock selection approach. The core investment philosophy of GARP (Growth at Reasonable Price) would be followed for stock selection.
Business Cycle Approach
Business cycle approach is an investment strategy based on identifying the economic trend. Macro-Economic conditions and the fiscal/monetary policy response by the government/central banks, during an on-going business cycle may affect business cycle on the basis of conditions prevailing at the time. Such distortions often provide appropriate opportunities.
The business cycles have four different phases and each phase offers unique opportunities and rewards:
- Expansion: Strong demand, capacity utilisation above normal, strong output growth, strong corporate profitability, strong tax revenues, very low risk aversion
- Recession: Demand growth starts to slow down, capacity utilisation starts to fall, output growth starts trending lower, tax revenues moderating, risk aversion starts to increase
- Slump: Demand growth below normal, capacity utilisation much below normal, very high risk aversion
- Recovery: Demand growth starts to pick up, credit growth starts to improve, tax revenues start to pick up
It has been observed that over period of time, stock returns are largely driven by cyclical factors tied to macro-economic factors and hence corporate earnings. The business cycle can therefore be a critical determinant of equity market returns and the performance of respective sectors.
Under normal circumstances, the asset allocation will be as under:
Table 2: Asset Allocation of Baroda Business Cycle Fund
|Instruments||Indicative Allocation (% of assets)||Risk Profile|
|Equity and equity related instruments selected on the basis of business cycles*||80||100||High|
|Other equity and equity related instruments*||0||20||Medium to High|
|Overseas equity and equity related instruments, including ADR, GDR, or any other type of securities||0||20||High|
|Units issued by REITs & InvITs||0||10||Medium to High|
|Debt/Money Market instruments including units of Debt oriented Mutual funds as may be permissible from time to time#||0||20||Low to Medium|
*including derivatives to the extent of 50% of the net assets of the scheme.
#Investment in securitized debt will not exceed 10% of the net assets of the Scheme.
(Source: Scheme Information Document)
Who will manage Baroda Business Cycle Fund?
Mr Sanjay Chawla, Mr Abul Fateh and Mr Pratish Krishnan (for overseas investments) will be the dedicated fund managers for this scheme.
Mr Sanjay Chawla is the Chief Investment Officer and Fund Manager at Baroda Pioneer Asset Management Co. Ltd. He has over 30 years of experience in fund management, equity research and management consultancy and has completed MMS from BITS, Pilani. Prior to this, he was associated with Birla Sun Life AMC as Sr. Fund Manager-Equity, SBI Capital Markets as Head of Research, Motilal Oswal Securities in the equity research, IDBI Capital Markets, SMIFS Securities, IIT Invest Trust & Lloyds Securities.
The other schemes managed by Mr Chawla are Baroda ELSS’96 Fund, Baroda Banking and Financial Services Fund, Baroda Hybrid Equity Fund, Baroda Dynamic Equity Fund, Baroda Conservative Hybrid Fund, Baroda Multi Cap Fund, Baroda Large Cap Fund, Baroda Large and Mid-Cap Fund and Baroda Mid-cap Fund.
Mr Abul Fateh is Senior Equity Analyst and Fund Manager at Baroda Pioneer Asset Management Co. Ltd. He has over 15 years of experience in Equity Analysis and his qualification includes M.Sc. (Mathematics) and Post Graduate Diploma in Securities Markets. Prior to this, he has worked with Geecee Investments as a Senior Equity Analyst, Baroda Pioneer AMC as Senior Equity Analyst, L&T Mutual Fund (erstwhile DBS Chola Mutual Fund) as Deputy Manager, Investments and Parag Parikh Financial Services as an Equity Analyst. The other scheme Mr Abul manages is Baroda Equity Savings Fund.
Mr Pratish Krishnan is Senior Analyst and dedicated Fund Manager for overseas investments at Baroda Pioneer Asset Management Co. Ltd. He has over 15 years of experience in equity research and holds a degree in B.com and MMS (Finance). Prior to joining this AMC, he was associated with leading institutional brokerage houses such as Antique Finance and Bank of America Merrill Lynch as a sell side analyst.
The other schemes managed by Mr Krishnan are Baroda Equity Savings Fund, Baroda Banking and Financial Services Fund, Baroda Conservative Hybrid Fund, Baroda Credit Risk Fund, Baroda Dynamic Bond Fund, Baroda Dynamic Equity Fund, Baroda Gilt Fund, Baroda Hybrid Equity Fund, Baroda Large Cap Fund, Baroda Large & Mid Cap Fund, Baroda Mid-Cap Fund, Baroda Short Term Bond Fund, Baroda Treasury Advantage Fund, Baroda Ultra Short Duration Fund and Baroda Banking & PSU Bond Fund.
Fund Outlook – Baroda Business Cycle Fund
Baroda Business Cycle Fund will focus on dynamic allocation between various sectors and stocks at different stages of business cycles in the economy. It will endeavour to benefit from the changing economic cycles.
The scheme offers investors with an early mover’s advantage by focusing on forward indicators to identify investment opportunities well ahead of time. It will hold no sectoral caps on allocation and serve as all season fund that could offer the agility to move across sectors.
A periodic assessment of the macro-economic environment and the subsequent investment business cycle approach would be conducted, based on which the portfolio may be reallocated. However, this scheme will focus on investing in opportunities arising out of various stages of business cycles. This could limit the capability of the fund with a concentrated exposure towards few sectors, thus making it a risky proposition.
The performance of this scheme will depend on the fund manager’s ability to effectively identify the shifts in business cycles and swiftly capture the opportunities across various sectors and stocks at the right time.
Therefore, this scheme is suitable only for investors with high-risk appetite and long-term investment horizon of at least 5-7 year to survive the market volatility. You should ensure that your investment objective is aligned with the fund.
This article first appeared on PersonalFN here