India’s export engine is built on information technology (IT) sector. But the market has a love-hate relationship with the sector. At the height of the dot-com boom, in March 2000, IT companies accounted for 33% of India’s market cap. Aditya Birla Sun Life Digital India was once Alliance New Millennium, a popular scheme launched at the height of the dot-com boom in 2000 (as the new millennium dawned). However the dot-com bubble burst soon after and, Alliance New Millennium also fell spectacularly. Alliance Mutual Fund was later acquired by Aditya Birla Sun Life and the fund became Birla Sun Life New Millennium Fund.
Those days are long gone. IT’s share of India’s market cap has fallen from 33% to 9% at present while banking and finance raised its share from 7% in 2000 to 23%. TCS may be India’s largest company but the sector is a shadow of its former self in investors’ eyes. However, without much fanfare, the sector has put in a strong showing in recent years with a five-year CAGR of 20.8%. Aditya Birla Sun Life Digital India has beaten the category and benchmark over different time periods. In the past one year, it has delivered a 38% return, outperforming the category average of 34.9% and the S&P BSE Teck benchmark which is up 19.6%. The fund has had the same manager at the helm since 2014, Kunal Sangoi.
From 21st May 2018, the fund will be officially known as Aditya Birla Sun Life Digital India Fund. The new mandate gives it a broad remit – technology, telecom, media and entertainment and other ancillary sectors. We spoke to Mahesh Patil, Co-CIO, Aditya Birla Sun Life AMC, to understand more about this fund and more:
Aditya Birla Sun Life New Millennium Fund will change its name to Aditya Birla Sun Life Digital India Fund. Is this just a change of name or does it signify a broader change in investment strategy or focus?
Primarily, this is a name change particularly to better represent the investment theme that the fund invests in. While the strategy and focus remain the same, there is expansion in the scope of investment that the fund will follow. Currently, it invests into Technology, Media & Entertainment, Internet and Telecom stocks. The fund will now also be able to take exposure to global technology stocks (up to 25% of net assets). Further, it can also invest in related ancillary businesses like business services companies.
The AMC is merging the India Opportunities Fund into the (soon to be called) Digital India Fund. The India Opportunities Fund was centred around the global outsourcing theme. Is this merger a sign of confidence in the tech sector?
India’s IT industry has had a phenomenal journey in the past three decades and generates over $150 billion in revenues. This industry gave India recognition on the global map. The popular perception is that India’s IT industry is reaching maturity and faces headwinds from cloud/automation adoption, however, we believe the technology sector is not to be written off soon and has a lot of headroom for growth. Most important aspect to consider is that the technology intensity across industries is significantly increasing and India’s value proposition continues to be very strong and competitive. Going forward, we see a convergence of technology, media content, and telecom beginning to play out in India too that can lead to value creation.
The scheme has delivered a stellar 39% return over the past year (as of 9th May 2018). The figures are also impressive for longer time horizons. What accounts for this strong performance?
This fund is an actively managed fund, and our strategy of taking a high active bet on companies having a good performance potential and importantly available at very good value has played out really well. A large part of the performance contribution came from companies identified in the mid-cap space with attractive valuations. From a sector perspective, not only midcap IT, but telecom equipment space also contributed to the strong performance.
The IT Sector has a whole has seen something of a revival over the past year. What is driving this sector’s rebound?
Growth for IT sector was negatively impacted in the past two years, i.e. 2016 & 2017, due to events like Brexit (2016) and later in 2017 due to concerns around job outsourcing in the US. These events have stabilized and improvement in global growth outlook has led to better growth visibility for the IT sector. The attractive valuations vis-à-vis broader market, weakening INR vs. global currencies and improvement in demand outlook has driven the sector’s rebound. Industrialization of digital tech led projects is also driving better demand visibility.
What role should a sector fund play in the portfolio of an investor?
An investor may consider having 15-20% of the portfolio in sector and thematic funds as that can provide added alpha. However, one should be careful in choosing the sector and take exposure to sector fund that has multiple years of headroom for growth.