Caught in a Storm: Are Your Mutual Funds Holding Adani Group Stocks?

February 1, 2023 Mutual Fund

The Adani Group owned by Asia’s richest man – Gautam Adani – is caught in the eye of a storm. US-based ‘Hindenburg Research’, a short-seller engaged in forensic financial research, has alleged the Adani Group companies of stock manipulation and accounting fraud. The firm has also accused Adani Group companies of improper extensive use of entities set up in offshore tax havens and has expressed concern about high debt levels. In view of this, Hindenburg said that seven Adani listed companies have an 85% downside on a fundamental basis.

Notably, the 32,000-word report came just two days before the launch of the Follow-on Public Offer (FPO) worth Rs 20,000 crore of Adani Enterprises, the flagship company of Adani Group. The FPO was subscribed by just 1% at the end of day one and was around 2% on day two, amid allegations by Hindenburg Research. However, the FPO was fully subscribed at the end of last day.

Adani Group stocks — ranging across industries such as mining, power, ports, roads, rails, airports, etc. — nevertheless, have witnessed high volatility of late. The impact of this has also been felt on equity mutual funds with exposure to Adani group stocks.

Following the allegations, the Adani Group published a 413-page reply rebutting the allegations of malpractices saying that the report was driven by ‘an ulterior motive to create a false market to allow the US firm to make financial gains’. Commenting on the rebuttal, Hindenburg mentioned that Adani Group’s response largely failed to answer every key allegation it originally raised.

The stocks are likely to extend losses in the coming days until the investors are satisfied with the clarifications and the speculations fade away.

Are your mutual funds holding Adani Group stocks?

Several Adani Group stocks were among the top performers between 2021 and 2022 fuelled by its expansion and acquisition plans. The sharp rally led to the inclusion of Adani Enterprises in the bellwhether Nifty 50 index in September 2022. Adani Ports & SEZ, Adani Total Gas, and Adani Transmission are among the other stocks that form part of the top 100 companies by market capitalisation.

Despite this, most actively managed mutual fund schemes preferred to stay away from Adani Group stocks. This is because certain aspects of Hindenburg’s report have not come as a surprise for Indian investors. Adani Group companies are highly leveraged (have high debt on balance sheets), are trading at expensive valuations, and there is also a question mark on the integrity of corporate governance.

Mutual Funds avoided Adani stocks due to expensive valuations and high debt

(Source: equitymaster.com) 

The nil to low exposure to Adani Group companies was one of the reasons that led to the underperformance of numerous large-cap oriented mutual funds in the last couple of years, while passively managed funds that track the Nifty 50 index fared better.

But unless there is a drastic change in corporate governance and valuations are favourable, most mutual funds will continue to avoid investing in Adani group companies.

DSP Mutual Fund, IDBI Mutual Fund, Indiabulls Mutual Fund, ITI Mutual Fund, Nippon India Mutual Fund, PGIM Mutual Fund, Quant Mutual Fund, Shriram Mutual Fund, Tata Mutual Fund, and Taurus Mutual Fund held allocation to Adani Group companies (as of December 31, 2022) in their diversified equity schemes and hybrid schemes.

While some other fund houses like Aditya Birla Mutual Fund, Bank of India Mutual Fund, Edelweiss Mutual Fund, HDFC Mutual Fund, ICICI Pru Mutual Fund, IDFC Mutual Fund, IIFL Mutual Fund, Kotak Mutual Fund, NJ Mutual Fund, SBI Mutual Fund, Sundaram Mutual Fund, Union Mutual Fund, and UTI Mutual Fund had allocations to Adani Group companies (as of December 31, 2022) in their thematic and hybrid schemes.

Out of these Quant Mutual Fund and Tauras Mutual Fund are exceptions as several equity-oriented schemes of the two fund houses hold significant allocations to Adani Group companies. These schemes benefitted from the sharp rise in the stock prices of Adani stocks such as Adani Ports & SEZ and Adani Enterprises in the last two years. Quant Mutual Fund schemes currently rank among the top performers in their respective categories.

However, these schemes witnessed a single-day drop of around 3-4% in their NAVs, compared to a drop of 2% or less in schemes that avoided investing in Adani Group companies. If the stock prices continue to plunge, the performance of these schemes could suffer in the near term.

Actively managed schemes that hold high exposure to Adani stocks

# Includes actively managed schemes with over 2% allocation in Adani Group stocks.
Data as of December 31, 2022
(Source: ACE MF) 

Many other passively managed mutual fund schemes carry exposure to Adani stocks through Index Funds and ETF route since the stocks form part of key indices such as the Nifty 50 and Nifty 100 index. Among the passively managed funds, schemes tracking the Nifty Next 50 index have the highest exposure to Adani stocks at around 9%, followed by the Nifty 100 equal weight index, Nifty 200 Momentum 30 index, and Nifty 100 index at around 4-5%.

Index Fund sub-categories that hold high exposure to Adani stocks

Data as of December 31, 2022
(Source: ACE MF) 

What should mutual fund investors do?

Adani Group stocks are expected to remain volatile in the near term. If you are holding actively managed schemes with a higher allocation to Adani Group stocks, it may be a cause of concern as it may have a significant impact on their NAVs. However, the active fund managers have the flexibility to trim the allocation to Adani Group stocks and may even diversify the risk due to their holdings across different stocks in the scheme’s portfolio.

You may even consider exiting the scheme if you are not comfortable with your mutual fund scheme holding exposure to Adani Group companies, as the Hindenburg report has raised a direct question on its governance and accounting practice. Moreover, it is important that you hold about 5-7 quality schemes in your portfolio, depending on the size of your investment portfolio to enable optimal diversification across investment styles/strategies.

At PersonalFN, we have always encouraged investors to focus on creating a diversified portfolio of best mutual funds based on their financial goals, risk profile, and investment horizon.

Actively managed schemes have the flexibility to add or remove a particular stock/sector depending on the outlook. Moreover, actively managed schemes restrict top allocation in individual stocks to 10% to avoid concentration risk.

Meanwhile, passive funds simply mirror the composition of a particular index. Thus, during polarised market rallies wherein a handful of stocks have been driving the index, passive funds have generated better returns than actively managed funds. However, like actively managed funds, passive funds too are susceptible to market volatility and can witness a higher downside if any of the top-holding comes under pressure.

[Read: Looking to Generate Alpha Over the Long-term? Here’s Why Active Funds May Still Be a Better Option Than Index Funds]

As an investor, you can suitably invest in active funds, passive funds, or a combination of both with a suitable allocation, and invest with a long-term view to sail through the short-term market volatility.

This article first appeared on PersonalFN here