Sundaram Mutual Fund is set to launch a new open-ended equity fund offering based on a theme after a gap of over one and a half years. As the name suggests, the fund offering is betting big on ‘services’ theme. At present, most of the funds that only play this theme use a narrow approach of betting on banking and financial services or export services in the form of Information Technology (IT).
In that sense, the Sundaram Services Fund has a much wider mandate as it can invest in financial services, healthcare services & fitness, trade, tourism & hospitality, transportation business services and others like media, entertainment & gaming, telecom/data providers, and online services.
Investible universe – In the large-cap space, there are 31 companies with an aggregate market cap of over Rs 30 lakh crore. In the mid-cap segment, there are 40 companies with an aggregate market cap of about Rs 7 lakh crore. Also, in the small caps, there are over 120 companies with a total market cap of more than Rs 4 lakh crore. In total, the open-ended fund can choose to invest from a basket of over 190 firms.
It can invest in financial services (retail lenders, wealth management, insurance providers), healthcare services & fitness firms (also hospitals, diagnostic chains), trade, tourism & hospitality companies (retail, hotels & restaurant, tourism), transportation (aviation, logistics), business services (BPM services, staffing etc.) and other service providers like media, entertainment & gaming, telecom/data provider, and online services.
Why services – Indian economy is driven by services. The growth narrative has shifted from agriculture to services. As per data, services account for more than 53% of the GDP. However, from the investor point of view, only 35% of the total market cap of India is accounted for by ‘services’. Hence, there is room for market cap expansion to match the GDP contribution.
Globally, consumer service indices have shown good performance. The indices have outperformed benchmarks over time. For instance, US Consumer Service Index has delivered a CAGR of 15.4% vs 11.5% of S&P 500. The MSCI Japan Consumer Service Index has delivered a CAGR of 17.8% vs 11.5% of Nikkei. Similarly, the UK Consumer Service Index has delivered a CAGR of 9.9% vs 4.1% of FTSE 100.
Coming to India, the India Service Sector Index has delivered 5 times returns in 10 years. This is not a recent trend. The India Services Index has in fact delivered 50 times returns in 15 years.
Fund construct – The open-ended equity fund will invest in a well-diversified portfolio of large cap, mid cap and small cap stocks. Think of it as a multi-cap portfolio offering investment opportunity across the capitalisation curve. We agree that multi caps offer the best risk-return trade-off. It will have S&P BSE 200 index as the benchmark.
Fund Managers – S Krishnakumar, Rahul Baijal & Rohit Seksaria
NFO period: The new fund offering is slated to open on Aug 29, 2018, and close on Sep 12, 2018. The scheme is expected to reopen for ongoing subscription/redemption on Sep 26.
RupeeIQ take: The fund is designed to capture the benefits of investing in the all-pervasive ‘services’ theme. The fund managers have to be extra cautious in terms of choosing the right stocks given that services firms, because of their link to consumption, have been sharply re-rated by stock markets. If the fund managers are able to strike the right mix between growth and value, this new offering could be quite promising in the long-term. Investors should discuss with their financial advisor the scope of having this fund in their equity fund portfolio.