PineBridge Infrastructure & Economic Reform Fund, a new entrant in our recommended funds list in 2012, has been one of the best performers in the infrastructure space. The fund’s well-constructed portfolio of strong infrastructure companies with a penchant to stick to the investment theme has been one of the reasons behind our positive stance on this fund.
Huzaifa Husain, who has been managing the fund since June 2009, is passionate about the infrastructure theme at a time when there are only naysayers around him. We had a discussion with him concerning his views on the infrastructure sector and if the time is right to take exposure to this fund.
A snapshot of the past
According to Husain, when the National Democratic Alliance (NDA) government started bringing about reforms in 2002-03, the emphasis was on infrastructure, which led to huge spending in this sector in the next few years. However, the sector started undergoing a bad phase since 2008 when the financial crisis hit the global economy as a result of which the balance sheets of many companies in this space came under severe stress. The government then tried to sustain economic growth by giving tax breaks and fiscal incentives to rural India, while infrastructure spending took a back seat. While Husain is of the view that the government’s initial reaction to the crisis was in the right direction, he feels that the focus should have come back to this sector in 2010, which could have helped the economy sustain the growth momentum.
Husain took us through the main drivers of economic growth by dividing the past 12 years into two phases. In the first phase, i.e.2000-2008, the economy was growing at 7.1% and this could be called the golden era as it was also the period when reforms started in a big way in India. During this time period, consumption was growing at 6.2% while investments were to the tune of 11.5%. In short, the growth in investments was twice that of consumption, which meant that demand and supply were moving in tandem. Hence, inflation was in the range of 5.2% and this led to a drop in the 10 year G-Sec Yield by 300 basis points. The balance of trade, i.e. (exports –imports) was 2.8% of Gross Domestic Product (GDP), while the benchmark index i.e, Sensex was on a roll. On the other hand, in the second phase, i.e. 2008-2012, economic growth was no different from that of the first phase. The economy grew at the same 7.1% rate with no major deviation. As the financial crisis had hit the economy at the end of the first phase, the government tried to combat the situation by reducing excise duty, service tax rates, loan waivers, creation of employment guarantee program, etc. This led to a splurge in consumption which stood at 7.1%, while investments grew in the range of 5.8%. This can be clearly seen from the fact that during the last four years, projects have been delayed, land acquisition has become difficult and environmental clearances have become a thing of the past. Hence, in short, there has been a demand-supply mismatch which led to a rise in inflation to 7.6%.During this phase inflation turned out to be a big problem for policymakers and Reserve Bank of India (RBI) got into action by increasing the key rates aggressively and the benchmark yield was up by around 60 basis points. This phase also saw trade balance rising to 6.9% of GDP and the currency depreciating. Hence all the high frequency data points became negative and Sensex considered to be the barometer of economic growth grew at a mere 10%. Source & date needs to be mentioned for the data given above
In short, Husain is of the view that during the first phase, infrastructure funds were one of the good performers in the industry and this was definitely on the back of the growth in investments during this period. However, funds in this sector have been underperforming during the second phase as the government has shifted track by giving more importance to consumption while the infrastructure sector was neglected.
What can investors expect going ahead?
Husain pointed out that although infrastructure as a sector has not been performing during the last four years, he believes that this would be the last leg of underperformance. This optimism comes from the belief that when the country is pushed into a crisis like the current situation, wherein the currency is depreciating, rising inflation, fiscal deficit, etc. our policy makers are known to hit the panic button and initiate reforms on a large scale.
The fund manager is also of the view that savings are essential to accelerate investments in an economy. Since the government started riding on the consumption theme from 2008, the rate of savings in the economy has shown a declining tendency. Hence, the government has started implementing reforms so as to improve savings which in turn is imperative for investments. Husain classified the reforms into two categories, i.e. Physical rationalization and improvement in investment climate. The former refers to subsidy rationalization, natural resource pricing, disinvestment, etc. On the other hand, in the latter case, the government is taking steps like encouraging Foreign Direct Investment (FDI) in retail, aviation and media, setting up of National Investment Board (NIB), now called Cabinet Committee on Investment, tax proposals, etc. All these measures may lead to more savings which will support investments in the coming months.
Another point raised was the fund managers’ conviction on the monetary stance that the central bank will be following in the coming months. Husain feels that RBI may cut the policy rates which could be a huge stimulus for India Inc as this will bring down the cost of funds which will be a boost to investments. On the other hand, with Initial Public Offerings (IPOs) coming into the market, fresh equity is getting raised, which in turn will bring down the debt equity ratios of corporate India. All these positives may lead to healthier balance sheets which could provide a conducive environment for companies to invest. Husain finally wound up his discussion on the sector by saying that the fund management team is cautiously optimistic on the same.
The fund’s investment philosophy
The fund manager then moved onto explaining the investment philosophy and strategies that are followed while managing PineBridge Infrastructure & Economic Reform Fund. The objective of this fund is to deliver reasonably good performance vis-à-vis the relevant index over the long-term by using a bottom up research process and minimizing risks by investing in companies with a strong business, good management and reasonable balance sheets. Husain elaborated on his philosophy by saying that he and his team normally do detailed research on a whole lot of companies and take a call to invest only if they have a strong running business, a balance sheet which is not leveraged and a stable management. Husain’s fund sticks to the definition of infrastructure as defined by the Empowered Sub-Committee of the Committee on Infrastructure, Planning Commission of India. As per this definition, his portfolio will have different types of *companies like resource based companies (Coal India, Petronet LNG, etc), developers (Jindal Steel & Power (JSPL), National Buildings Construction Corporation (NBCC), builders (Larsen & Toubro (L&T), Sadbhav Engineering), products (Shree Cement, Cummins India, etc) and others like Rural Electrification Corporation (REC), Power Grid Corporation of India,etc. The other theme that this fund focuses is economic reforms. Here Husain refers to companies that will benefit when the government reduces the fiscal deficit. In this theme, Husain covers companies in fertilizer, oil and gas sectors and Public Sector Undertakings (PSU) banks.
Finally Husain concludes his entire discussion in a nutshell: Infrastructure: Dark before Dawn? The reasoning behind this is that with the government being serious about implementing all the major reforms, Husain thinks that the dawn is almost here and this is the last stage of darkness.
FUNDSUPERMART.COM’S TAKE ON THE FUND
We have been positive on the infrastructure space while the sector has been going through a bad phase for the last few years. In this space, one of the funds that we like is PineBridge Infrastructure & Economic Reform Fund which sticks to its mandate and has a strong fund management team which has been steering this fund since its inception. All our risk appetite investors who have the patience to wait for 5 years can take an exposure into this fund.
*The above mentioned securities do not constitute the complete portfolio of the scheme and are meant for illustrative purposes only. There is no assurance that any security shown will be held in the portfolio at a future date.
All data points included in this article have been taken from the presentation titled “India Equities “prepared by Huzaifa Husain, Head –Equites, PineBridge Investments, India.
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