As markets are becoming more advanced and mature, investment strategies are incorporating different styles and methods to achieve desired returns. There are growth and value styles, fundamentally driven strategies, tactical allocation strategies, sector-based strategies and the list goes on.
We never know when a trend toward a certain style or strategy may take off and gain popularity among portfolio managers and investors. If we were to explore the sector-based approach, we could easy identify some clear advantages. First, it showcases a clear classification in which the focus toward that sector and its trends can easily be tracked with changing conditions, as companies within that sector will tend to behave similarly. Sectors can also be used as a basis for various investment strategies, and they may help manage risk efficiently by titling sector preferences based on required risk exposures.
In my previous blog “Building the Hope for Change,” I mentioned the Indian Planning Commission’s 12th Five Year plans that have outlined some major projects. The new Indian government seems to have recognized the much-needed boost for infrastructure and is reviewing plans toward the same.
Last month, we launched the S&P BSE India Infrastructure Index amid a positive sentiment in the market. This index is focused on primarily five clusters: utilities, energy, transportation, telecommunications and the non-banking financial institutions that are categorized by the Reserve Bank of India as “Infrastructure Finance Companies” or derive major business revenue from Infrastructure Finance. As spirits in the markets are soaring high, this index has reflected the mood with an annualized one-year return of 54.03% (one-year annualized total return as of June 16, 2014). A comparison with the bellwether S&P BSE SENSEX at 33.39% (one-year annualized total return as of June 16, 2014) and the S&P BSE 500 at 35.77% (one-year annualized total return as of June 16, 2014) showcases the S&P BSE India Infrastructure Index’s outperformance in the one-year category.
Exhibit 1: Comparison of One-Year Annualized Total Returns
Source: Asia Index Private Limited. www.asiaindex.co.in One-year annualized Total return for the year ending June 16,, 2014. Charts and graphs are provided for illustrative purposes. Past performance is no guarantee of future results. This chart may reflect hypothetical historical performance. Please see the Performance Disclosures for information regarding the inherent limitations associated with back-tested performance.
If we evaluate the performance of the indices over a longer term, we see that the trend of out performance may not be similar, hence it is important to evaluate the investment profile and time horizon when investment strategies are formulated.
Index investing can easily facilitate sector investing. With lower costs and ease of transaction, this form of investing helps support various investment strategies.
To learn more about Infrastructure Investing, listen to our our webinar from last week “Trains, planes & Infrastructure Investing.”