By Balaji Vaidyanath / Kr Senthilnathan / Devang Patel
There is now a general consensus that the so called 'de-globalization' and geographical diversification will lead to better fortunes for Indian manufacturing, technology, research, healthcare etc. If this situation were to play out over the next 10-15 years, could we witness the weight of some heavy weight sectors to come down in mainstream indices so as to give way for the new winners? This is especially so in the context of the Nifty50 Index which has a limited shelf space of 50 stocks.
'All I want to know is where I'm going to die so I'll never go there' by Buffett & Munger provides examples of how to make fewer mistakes than other people. Rather than predicting winners, this is an attempt to avoid losers. Which is the one sector that has the potential to lose weight in the Nifty to make way for the future winners?
Could it be financials? Wait.. What? Financials contribute 1/4th of the Nifty PAT and 1/3rd of Nifty's market capitalization. Some of the 'bluest' of blue-chip names are part of the financial sector in Nifty. Blue-chip companies and legendary cricketers have a lot in common. Consistency across formats/cycles, excellent past track record, proven market beaters/match winners. Yet at some point, selectors tap on the shoulders of these cricketers and have a conversation about their future and the team's future. Despite the legend that he is, M S Dhoni was retained by CSK as the 'second retention choice' for Rs 12 Crores while shelling out Rs 16 Crores for Ravindra Jadeja and Rs.14 Crores for 'young' Deepak Chahar.
Similarly, should we as investors and money managers take a hard look at some of the existing blue-chip companies and re think whether they deserve the already high weight that they are commanding in our portfolios today?
Between 2005 and 2015, all a large cap fund manager had to do was to under-weight Reliance Industries in order to beat Nifty. Is under-weighting financials the only call that a large-cap manager has to make to beat Nifty over the next decade?
Not an easy answer. However, observing the current index composition and constituents of major developed market indices can provide us some cues. Weight of financials in most developed market indices have been trending down. Average weight of financials across Dax, CAC, S&P 500, Netherlands, Japan and UK is 12%. Read on.