Should investors lap up or ignore SBI Energy Opportunities Fund?

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The SBI fund will be benchmarked against the Nifty Energy Index, which has delivered 20% annualized returns over a five-year period (as of 31 January), as against 14.9% annualized returns delivered by Nifty 50 Index in the same period.

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The SBI fund will be benchmarked against the Nifty Energy Index, which has delivered 20% annualized returns over a five-year period (as of 31 January), as against 14.9% annualized returns delivered by Nifty 50 Index in the same period.

How it works

The fund will invest in a mix of traditional and new energy businesses.

“Traditional energy companies are incubating new energy businesses. Because of policy reforms, the profit pools of traditional energy companies are increasing and it is much more predictable. And that will lead to value creation, when this new cash flow is put to use for new energy business,” says Raj Gandhi, fund manager at SBI MF.

To be sure, oil and gas exploration and production giant Reliance Industries has planned 75,000 crore of capex for new energy business. Recently, oil producer ONGC and power firm NTPC entered into a joint venture agreement to set up offshore wind energy projects.

The SBI fund will be benchmarked against the Nifty Energy Index, which has delivered 20% annualized returns over a five-year period (as of 31 January), as against 14.9% annualized returns delivered by Nifty 50 Index in the same period.

“The Nifty Energy Index has gas value chain, power utility value chain, oil value chain. It has the traditional energy value chain there. However, we will be taking lot of active bets outside the benchmark. We will be looking at lot of these new energy companies as and when the opportunity arises,” Gandhi says.

The fund will also be looking at power ancillary companies such as transformer manufacturers, heavy electrical equipment makers, energy efficiency plays, etc.

The fund also has provision to invest in international stocks. “Whenever we find an investment opportunity in terms of international energy companies, we will be looking at opportunities there as well,” he says. The fund can invest upto 35% of its corpus to international stocks.

The fund house’s joint venture partner and global asset manager Amundi can help when it comes to international investment opportunities.

For now, the tilt of the fund would be more towards large-caps, but Gandhi says as more newer energy businesses emerge, the spread across different market caps could widen.

Valuation play

While the Nifty Energy Index has outperformed benchmark Nifty Index as mentioned above, the valuations appear to still be in favour of Nifty Energy Index. The latter is trading at 15.8-times 12-month trailing earnings, which is at a 25% discount to Nifty 50 Index.

“The fund can be seen as a medium-term tactical investment. The fund will look to capture the entire energy theme and not just a particular sector,” says Ravi Kumar TV, co-founder of Gaining Ground Investment Services.

There are two funds in the MF industry that invest in Indian energy companies—Tata Resources and Energy Fund and DSP Natural Resources and New Energy Fund— but both these funds are a blend of energy and other commodities.

SBI Mutual Fund’s report points out that there is a long runway for growth in India’s energy space as the largest global energy company has a market cap of $2,048 billion, which is 4.6-times of the entire Nifty Energy Index.

The weight of the energy sector fell from 24.8% in December 2004 to 6.7% in December 2023 in the S&P BSE 200. The same report points out that the sector is under-represented in the index because of issues with profit pool and valuations assigned to the available profit pool. The fund house expects both these issues potentially getting addressed with policy reforms in the traditional energy segment and impetus on green energy.

What should investors do

While the investment universe of the fund will be 90-95 stocks, the fund will invest in 20-25 stocks. Hence, the portfolio could be concentrated.

The fund can be a tactical opportunity, but getting the timing right is critical when it comes to thematic or sectoral funds. All investors may not be able to do so.

“For retail investors, diversified equity funds are advisable. Aggressive investors can take larger exposure to thematics, but retail investors should limit their theme-based investments to 5% of their portfolio,” says Nisreen Mamaji, founder of MoneyWorks Financial Services.

Retail investors can consider large-, mid- or small-cap funds, depending on their risk-appetite, as part of their core portfolio. Or go for flexi-cap funds, which don’t have minimum thresholds for any particular market cap and can invest across the market caps curve.

The SBI Energy Opportunities Fund’s new fund offer period is open till 20 February.

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