Hence it’s important to have a fund that captures this theme and lot of moving parts which drives this economic journey. For example, the sale of cars, consumer durables in boom times will register record sales, while at busts, sales will slow down dramatically. While consumer staples demand will be relatively more stable across the cycles. Hence it’s important to be in the right space as far as business cycles are concerned.
During strong economic growth periods, most companies of all hues generally do well. It’s the bad times, which separates the wheat from the chaff. Hence it’s important to be extremely selective to pick your stocks right during downturns. Some companies at times are small in terms of their market cap, however dominate their domain area. They gain market share purely on their ability to adjust to market conditions, while weaker players struggle. Hence the business cycle fund is flexible to invest across market caps.
These cycles can also be seen in terms of industry cycle, with a sector moving from growth phase to maturity phase, resulting in different dynamics along the way. Hence positioning of the portfolio can be done, with preference for mature and stable businesses during downturns, while growing businesses in expansion phase. The fund manager takes a multi-dimensional approach while managing the fund.
Top sectors keep rotating as per business cycle
As seen in the chart above, cyclicals and defensives perform, it’s the economic cycle which decides which will perform better.
Changes in the economy, fiscal and monetary policy actions combined with global influences, results in frequent rotation in sector performance. Sectoral allocations have been contributing significantly to alpha creation. Thus the ability to capture these frequent shift in business conditions for and against the sector, is a key differentiator. A business cycle fund may be over/under weight on certain sector based on where we are in terms of the economy cycle.
The fund manager may have a widely diversified portfolio in terms of no. of companies, or may follow a focused strategy depending on the fund managers view.
To sum up, a business cycle fund is an aggressive strategy as the fund manager will take larger bets compared to a diversified multi-cap fund. He aims at generating alpha by capturing the shift in economy cycle. Hence its suitable if you have a time horizon of 5 years+ or use a SIP to take benefit of market volatility.