FMCG schemes have delivered great returns. But how much of it is a matter of chance?

Moneylife Digital Team

Fast-moving consumer goods (FMCG) companies’ stocks have performed exceptionally well over the past few years. Between December 2007 and June 2012, the BSE FMCG Index was up 18.59% compounded annually, despite the Sensex declining by 12.78% annualised. In fact, FMCG companies’ stocks have recorded a huge rally over the whole decade.

Taking three-year rolling periods with a monthly frequency, FMCG mutual fund schemes have given an average return of 31.88% in the past 15 rolling periods. The Sensex returned an average of 13.29% for these periods. FMCG schemes returned as much as 42% in the three-year period from 31 March 2009 to 1 April 2012. FMCG companies have delivered great returns because they enjoy strong demand from an increasingly prosperous Indian middle- and lower-middle class and are able to service that demand with low capital employed.


There are around 30+ sector schemes available in the market today. Of these, 13 are infrastructure schemes and just two are FMCG schemes. Both these schemes—ICICI Prudential FMCG and SBI Magnum Sector Funds Umbrella—FMCG, were launched in 1999. Though the returns of these schemes are similar, the scheme from SBI has outperformed that of ICICI on most occasions.

The top 10 holdings of these schemes, as of 30 May 2012, are more or less similar. ICICI Prudential FMCG invests in just nine top stocks, whereas SBI’s FMCG scheme has 13 stocks in its portfolio. Both these schemes have invested 35% to 40% of their assets in ITC Ltd. This shows that these schemes are just following the benchmark where the weightage of ITC is more than 50%. Hindustan Unilever (HUL) has the second highest weightage (around 10% to 15%) in the portfolio of these schemes as well as their benchmark index. A few other common names include Dabur, Marico and Tata Global Beverages Ltd.

FMCG schemes have done well in the past as stocks like ITC and HUL which command a weightage of more than 50% of the assets have done well. But have these schemes done as well as they should have?

In the period from March 2003 to May 2012, companies like Emami, VST and Marico have performed much better than ITC and HUL. Therefore, there was less of stock selection and weighting and more of following what is higher in terms of market-cap. And having a major portion of the assets invested in just a couple of stocks could be highly risky. If the FMCG sector was, indeed, something that mutual fund companies had identified as a hot sector, there would have been many more schemes on offer. Why aren’t there more? They had no inkling that it would work out so well. It was pure chance.

One of the main reasons why we caution investors to be wary of sector schemes is because some of these schemes invest in companies of unrelated sectors. For example, ICICI Prudential FMCG has 3.75% of its assets invested in Pidilite Industries which is a chemicals company with fortunes tied to the construction sector.

Internationally, FMCG stocks are called ‘defensive’ bets. When the broader market is down, these stocks hold their ground well, offering stability to the portfolio while other stocks take a beating. But, in India, these are growth stocks with high profit growth and high returns on capital.