Sectoral and thematic funds are conventionally used as part of dynamic asset allocation for top ups to a fully constructed portfolio. Thematic funds, by definition, invest across various sectors bound by the primary theme. As per SEBI’s re-categorisation circular, thematic funds are those which have a minimum 80 per cent of total assets invested in equity and equity-related instruments of a particular theme. Some of the popular themes from the past include public sector undertakings (PSU), consumption, energy, multinational corporations (MNC), and infrastructure.
To elaborate, a thematic fund built around infrastructure might invest equities in construction companies, cement companies, steel companies, and sometimes, with a leap of faith and stretching of the definition, even in banking and other firms indirectly related to the infrastructure sector. Where thematic funds seemingly score over sectoral funds, at least in theory, is that the former are more diversified compared to the singular sectoral focus of the latter.
A Theme that has already gained acceptance in developed markets and is fast gaining acceptance in emerging markets, especially in India, is that of Environmental, Social, and Governance (ESG) investing. Simply put, ESG investing translates into seeking sustainable and socially responsible investments. A company is seen to be ESG compliant if it meets all the criteria of environmental, social, and governance standards set by the fund. There is also focus on companies with environment-friendly practices, ethical business practices, and an employee-friendly record.
SBI Magnum Equity ESG Fund, which has an AUM of Rs 2,796 crore, is the oldest ESG Fund in India. It was converted to SBI Magnum Equity ESG Fund in May 2016. It has a 96 per cent equity exposure of which 91 per cent has been parked into Large Cap companies. This fund has generated close to 40 per cent returns over the last 6 months. Quantum India ESG Equity Fund which has an AUM of `21 crore, was launched in July-2019. It has around 95 per cent exposure into equities of which 70 per cent is in Large cap companies while 30 per cent is in Mid & Small caps.
It has generated 43 per cent returns over the last 6 months. Axis ESG Equity Fund which has an AUM of `1,729 core was launched in February-2020 and has around 98 per cent exposure to equities, of which 94 per cent is in Large Caps. It has generated over 34 per cent returns over the last 6 months. ICICI Prudential ESG Fund which was recently launched has which has an AUM of Rs 1,457 crore.
It follows a distinctly different asset allocation pattern with a 70-30 mix across Equity and Debt. Mirae AMC and Kotak Mahindra AMC are the latest entrants into the fray, though the former has chosen a different glide-path. These are still early days for ESG Thematic funds in India, and the belief is that young investors who have been sensitised to the underlying concept and its moral compass could fuel their growth. Nonetheless, the jury is still out on this one.
Ashok Kumar
heads LKW-India. He can be reached at ceolotus@hotmail.com