Business cycle fund: Investing based on what lies ahead

It is a well-known fact that equity markets go through various cycles. Similarly, business too goes through various cycles such as growth, recession, slump and recovery. However, there is no one-to-one co-relation between the markets and the economy. In each of these phases, the economic conditions will vary and so, the sectors which stand to gain or lose too will vary. Macro-economic conditions and the fiscal and monetary policy response by the govt. and central banks, during an on-going business cycle may extend or shorten a business cycle basis conditions prevailing at the time. Such distortion often provides appropriate opportunities to invest.

In order to capitalize on such opportunities it is imperative to invest in a fund which looks into the macros and takes investment decisions based on how the macro factors are stacked up. For example: When it came to investing in the last decade, matters were much simpler. This is because the era was headlined with easy monetary policy along with constant interest rate cuts all of which led to the market volatility to being highly curtailed. At such times the appropriate investment strategy is to be positive for equities as an asset class and invest in long duration schemes in order to capitalize from the rate cuts. However, the situation is not the same for the next decade. Hence, an astute investor will gauge that it is time to switch gears.

In the coming decade, markets will be under pressure on account of various geo-political developments, energy prices, central bank policies etc. Put together all these factors the market look prepped for more volatility. At such a time, the strategy is to be nimble as the macro environment changes. It is important to stay invested in funds which have the ability to move in and out of sectors swiftly. Moreover, because the volatility is high, the portfolio should be capable of prudently positioning between sectors in order to make the most of the prevailing economic cycle. This is here where Business cycle fund comes in.

About the Fund

The idea behind the fund is simple. Take exposure to three to five sectors at any point in time based on the prevailing macro situation. The style of investment will not boxed into either value, contra, growth or any such styles. The approach will be purely top-down in nature. The investments made in this fund will be spread across market capitalizations in order to tap into the opportunities present across the spectrum. In other words, the fund will not have any capping in terms of themes, sectors or market capitalization. Such an approach gives the fund manager the room to explore various opportunities which will be prevailing in a particular sector.

Why this Fund now?

We are currently in a phase where the global growth is weak while domestic growth is robust. In such as phase, domestic cyclicals are likely to perform well. Therefore, pockets such as corporate banks, capital goods, metals, real estate and infrastructure are likely to do well.

As a result, it is time to invest in a fund which is nimble in terms of sector allocation and is quick to make opportunistic calls and this fund does exactly the same. So, if one is investing for the next decade, then it is time to consider macro based investing to make the most of the evolving economic conditions which is reflective in the markets as well.

While opting for this strategy an investor should have a holding tenure of at least five years or more. This is because, many of the calls taken will take time to play out. Investors with an aggressive risk appetite can consider investing in such type of an offering. To conclude, macro based investing is an interesting addition to the portfolio especially given the way global economies are evolving.

(The author is Director, VUK Finvest Pvt Ltd)