This article appeared in the inaugural issue of Money Mantra a new Personal Finance Magazine from New Delhi…1st Nov. 2009. Have not reproduced the table in excel.
FMCG is suddenly the favorite amongst everybody! Why is this so? Well any fund which clocks 67% return in one year is bound to suddenly attract interest, is it not?
Well so is the case of the FMCG sectoral funds. This sector has always be seen as a ‘defensive’ sector – it means consumption of food, cigarettes, alcohol and even retail stories like Pantaloon are normally indifferent to the performance of the real economy. You really cannot consume more toothpaste or soap when the economy does well can you?
However if you wind the clock a little you will find that the 3 and 5 year averages are not really as impressive as the One year performance:
SCHEME 1 YEAR 3 YEAR 5 YEAR
FMCG BSE INDEX 67% 9.5% 24.95%
SBI MAGNUM 66% 9% 17%
FRANKLIN FMCG 67% 11% 26%
I PRU FMCG 67% 8.55% 31%
The amount of corpus (assets under management) is almost laughable. The biggest fund is Icici Prudential with Rs. 63 crores, and SBI Magnum brings up the rear with Rs. 8 crores. Franklin FMCG friend has a corpus of Rs. 28 crores.
This sectoral index again shows how the market capitalisation weighted average index can dramatically increase the weightage of one or 2 big companies. Here ITC which has cigarettes, food processing, toiletries, and hotels makes up 39% of the weightage. HUL makes up 25% and Nestle almost 11% (see table). This means 80% of the weightage of the index is made up by 3 companies. In a year when these 3 companies do well this index will do very well. For whatever reasons if ITC were to do badly this index will go for a toss. So the caveat first – is this sector worth tracking? Yes, surely yes.
In the worst year for a FMCG fund it has given a return of -29% and in the immediate past year it has given a return of 67% – the standard deviation is just too high. To make money in any sectoral fund you need to be very good with timing the market. This is quite paradoxical – the average investor comes to the mutual fund industry because he / she is not capable of timing the market.
Some notable exceptions in the index are of course Procter and Gamble, and Gillette. Whether the index will be reconstructed after there is clarity about their merger is not known. For a retail investor investing in ITC, HUL, Nestle, P&G, Gillette, Dabur and Marico would give them a good spread of Indian and Foreign FMCG players – but he would have still missed out Colgate which is an investor’s darling. FMCG is surely a defensive strategy and the current cash flow from all over the world has taken the price earning ratios of all the companies to dizzy heights. Many of the typical FMCG companies like ITC, Colgate, Gillette have done exceedingly well in the past few months but may have had more than their fair share of run up. None of the FMCG shares look cheap at this time, but most of these companies have justified their high price because of their good margins and good market share capture. The companies (especially the market leaders) have been able to pass on the increase in costs to the end customers (of late) and hence the operating margins have shown a healthy growth. HUL and Colgate in particular have been able to increase their realization by creating differentiated products and pricing them higher. However if the end user shifts from the MNCs to the Indian FMCG companies it will take a long time for the fmcg index to reassign weights to the Daburs and the Maricos. Godrej Consumer is perhaps the biggest listed player in the ‘hair dye’ market and the index does not really capture it, does it?
So in fine, what should the investor do?
If he is invested in a good large cap fund let the fund decide how much of fmcg exposure he needs. If he is invested in a fmcg fund please remember you are perhaps at an all time high already and there cannot be a market beating upside from these prices. If you have not invested in fmcg funds, stay away you really do not need them. Surely not at the current prices at which they are available. If over the next 3-4 years the fmcg funds get beaten down and you see 2-3 years of underperformance then you could put a small part of your money into a fmcg funds. Do remember however that shares like Gillette, P&G, Colgate, HUL at no stage look cheap – but all the value in these shares comes from good growth and neat margins!
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