“Many shall be restored that now are fallen and many shall fall that now are in honour” – Horace
Before going any further, I want to clarify that the article is just me jotting down few of my thoughts and analysis. It is neither recommendation or advise. I use this website to document my thoughts for my future reference.
Good times never last forever and similarly bad times “too shall pass”. This is also true for the stock markets. A few years ago, I started investing in pharma funds. As I normally do, I started a SIP in a pharma fund. I am not an expert on pharma sector and don’t have any special insights either. My simple logic was that the pharma as a sector is unlikely to lose relevance. Despite good performance over the long-term, the pharma sector was undergoing a particularly rough patch with the US regulators. Most of the companies in the sector are run well and had little debt. As mean-reversion is a powerful concept, my expectation was that the performance of the sector should improve. Even if the sector fails to regain its old glory, it will be a decent performer. My SIP’s performance for a long time was somewhat disappointing but I kept the faith and continued with the SIP. However, post the covid, the fortune of the sector changed and my SIP’s performance improved dramatically. I am still invested and continuing with my SIP.
The above experience taught me to look at sectors whose price performance has deteriorated and is much below its historical track record. Further, it will be good to see a disconnect between the stock market performance and business performance. What I mean by this is that while sector is appearing to improve its business performance, the same is not getting reflected in the stock price performance. Further, here I am looking at investing in the sector as a whole. I am no stock picker and I believe that we reduce the risks meaningfully by playing such themes through sector ETFs or funds. In this context, to me banking and financial services and auto sector appear to be good candidates for deeper analysis.
Now, I am using the data of ICICI Pru banking and financial services fund. This is mainly because I have invested in this fund in past and also, I have a SIP in this fund. The same analysis can be performed using other banking fund or ETF data.
Recent and long-term performance of the fund: The fund has very stellar long-term performance track record but returns in near to mid-term has been quite disappointing. The 3 year and 5-year returns are in low to mid-single digit while return over the last one year is negative. Clearly, the fund seems to have gone through a long period of correction and consolidation.
The point-to-point returns can be misleading and hence below we look at rolling return metrics. What we are doing is we are calculating series of rolling 3-year and 5-year return and see how dislocated the current rolling 3-year and 5-year return is from historical range.
What we observe is that current 3-year and 5-year rolling return of this fund is 1-standard deviation below long-term average. Unless one thinks that banking and financial services sector is completely doomed, there is case for some mean-reversion. What this essentially means that the fund could potentially deliver returns more in line with historical averages over the next 3 or 5-years.
Finally, we look at the performance of rolling 3-year and 5-years SIPs. The systematic investing over the 3-year and 5-year, on average, has delivered strong returns in the past. However, the performance of 3-year SIP or 5-year SIP is much below the historical average.
Based on all the above factors, to me it looks like a good time to start SIP in a banking fund. Normally, I like to invest in diversified funds as such calls can be taken by a fund manager who can overweight or underweight a particular sector. However, I feel 10-20% of the portfolio can be put in such thematic/sectoral funds for additional impetus. Needless to say that unlike diversified funds where we can remain invested for a long-term, thematic investing requires more regular monitoring. Having said that, I also feel that if one enters any investment at a good level, the same can be held for a long-time to come.
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