- Wealth PMS (50L+)
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ICICI Prudential Mutual Fund is rolling out a new housing opportunities scheme. The NFO (New Fund Offer) is open from March 23 to April 11. The fund will be open-ended and will be actively managed. We look at the pros and cons of the NFO and give our take on whether you should be investing in the fund.
Short take: Avoid. Like a lot of thematic funds, this one is restrictive. The fund will invest only in stocks that are beneficiaries of the growth in the housing sector. Curiously, there is little mention about investing in stocks of developers or builders. The benchmark constituents – Nifty Housing Index – seem to suggest that the index hardly offer anything dramatically different, and stocks are mostly from the Sensex/BSE 100 basket. Just six sectors, led by banking, make up the entire index. This ICICI Fund seems more like a small subset of business cycle and consumption (based on economic revival) themes with overtones from regular value and contra funds. Indeed, value and contra funds or, for that matter, most diversified schemes have been betting on sectors likely to benefit from an (impending) economic revival after the markets nosedived in March 2020. Themes with a slightly broader scope, such as consumption and infrastructure, would be better alternatives for investors looking for options outside their core diversified portfolios. In short, there is nothing new in this NFO for an investor that an existing offering cannot fulfil.
The fund’s mandate
The prospectus states that ICICI Prudential Housing Opportunities Fund will invest in equity and equity-related instruments of entities engaged in and/or expected to benefit from the growth in housing theme. The breakup is given below.
Source: Scheme information document.
The only eye-catching instruments are REITs (real estate investment trusts) and INVITs (infrastructure investment trusts). They may provide a kicker to returns, as they earn rental, lease and toll incomes, apart from cashflows by backing infrastructure projects (power transmission etc.).
Hemmed in by a restrictive mandate
As mentioned earlier, the fund will invest in sectors that stand to gain if housing demand rises over the next few years.
Source: Fund presentation
Here is what S Naren, the fund manager, said in an interview to a business channel: “Our entire approach is to look for a theme which has done badly and then see whether there is a good opportunity for the future and that is why we have launched Housing Opportunities NFO, and the advantage with that theme is that it gets to invest in several sectors like banking, cement, housing finance and power, which have also done badly over many years. It allows us to look at all those sectors for the future. We think that along with asset allocation, looking at themes which have done badly are a good way to invest for the future.”
The fund, then, seems to be a play on a few sectors that are currently undervalued in the eyes of the fund manager. Why start a theme fund just for that?
The housing opportunities fund is getting into areas that are likely frequented by most value, contra and even Flexi-cap or other diversified schemes of all hues. Every second fund manager has waxed eloquent about undervalued and beaten stocks and sectors that were ignored in the past decade now offer ‘interesting’ opportunities.
But take a look at the constituents of the Nifty Housing Index. Naren himself stated in the interview that metals are expensive, and investors must look to exit them (that was, of course, given as an answer to a different question)! But it is a key constituent of the fund. With commodity costs rising sharply in the last year, how far segments such as cement, metals, and oil & gas would deliver is difficult to address.
Source: Fund presentation
If the sectors hold nothing special to watch out for, the stocks are even more yawn-inducing in their selection. L&T, HDFC Bank, SBI and Asian Paints for housing revival anyone? Every other fund holds some or most of these stocks in their portfolios across mandates.
Unless ICICI Housing Opportunities drastically deviates from the weights on the top stock and sector holdings, there would be very little to look forward to from the fund that could differentiate it from any generic scheme.
The fund presentation states that the index has delivered 14% compounded annual returns. Even a two-star rated large-cap fund would have delivered three percentage points more over the same period.
A broad consumption theme would also have exposure to automobiles, consumer staples, and healthcare. Infrastructure funds would give exposure to a whole gamut of companies in the engineering, road construction and capital goods spaces and those offered by the housing theme.
Rising rates, Inflation could still derail a Housing segment in nascent stages of recovery
The fund’s presentation is filled with convincing arguments on why real estate as a sector and the housing market, in particular, could be in for a joyride after years of being in the doldrums.
From the heady days of 2004-10 to a period of consolidation till 2014-15, to facing the headwinds of demonetization, RERA (real estate regulatory authority) act enactment and GST (goods & services tax) law in 2016-17, and finally the COVID-19 lockdown sledgehammer, the segment has seen it all.
The following slide from the presentation sums up the last 15 years of the real estate sector.
Source: Fund presentation
Many factors are likely to pull the segment out of the rut.
So, population growth and favourable demographics, increasing urbanization and affordability, oversupply of the earlier years being absorbed, government policies and Capex (capital expenditure), and easy financing options are cited as factors that could lead to recovery.
Except for the last factor, companies and governments of all hues have highlighted all other aspects to attract investments and are quite generic in nature. There are counterarguments for each, but that can wait for another day.
But the easy financing option certainly holds for the moment. Home loan rates are at historic lows. At 6.5-7%, it is strange that home loans are cheaper than the 10-year government security’s (g-sec’s) yield (6.83%). In other words, the sovereign is borrowing at a rate higher than that applicable to an individual citizen!
With inflation – consumer price index – consistently above 6%, commodity prices (fuel, metals etc.) on an upswing and the Ukraine-Russia war showing no signs of ending, there is bound to be pressure on interest rates. Companies face high input cost pressure as well.
The Federal Reserve and the Bank of England have already increased rates. There is a perception that the RBI is behind the curve in curbing inflation. If interest rates are indeed increased, then home loans and, hence, the demand for housing may hit a roadblock.
In fact, if rates rise steeply, most industries – especially the capital-intensive ones – may face the heat.
Another critical aspect is that the overall economic recovery is yet to take full effect. The gross domestic product (GDP) growth has been in fits-and-starts post-COVID period.
Data from the CMIE (centre for monitoring the Indian economy) indicates that unemployment is still northward of 8%.
Urban employment as of March 25, 2022, has increased to 8.1%.
Given that only an estimated 15% of India’s workforce is skilled, a deterioration in the employment scenario would impact many parts of our society. Property buying decisions could be postponed or even cancelled.
Considering these points, the thesis of an imminent housing sector recovery is not necessarily carved in stone.
Lone peer’s unimpressive track record
ICICI Housing Opportunities isn’t the first of its kind. HDFC Housing Opportunities (it was close-ended from its inception in December 2017 and was made open-ended in January 2021). It has managed all of 5.65% compounded annual returns over the past four-odd years, compared to 14% generated by the BSE 500 TRI.
And no marks for guessing the top holdings of HDFC Housing Opportunities – L&T, HDFC Bank, SBI, NTPC, ICICI Bank, etc.
The following returns graph comparing it with the BSE 500 TRI clearly shows that it has lagged.
Over the past three-plus years, the one-year rolling return generates an average 1-year return of 11.2%. It has gone into the red (negative returns) a whopping 43.4 times and has delivered 0-10% returns 23.4% of the time. In short, all the heavy lifting has to be done via short but heavy spurts in its NAV (net asset value) for the fund to deliver even reasonable returns. Of course, lumpiness in returns is expected in theme funds, but eventually, the rewards must be superior too, which is not the case with this scheme, at least thus far.
ICICI Housing Opportunities may chart a different course from its peer’s trail, but there is no certainty.
Source: Rupee Vest
What should investors do?
We’d give this one a miss. A fund that offers a limited play on beaten-down stocks and sectors is a game that investors can participate in via many other fund options.