The searing rally in Reliance Industries Ltd. shares is becoming a problem for Indian equity mutual funds.
The stock has more than doubled since a March low, thanks to President Mukesh Ambani’s fundraising blitz. The increase has increased the company’s weighting on the S&P BSE Sensex to 17.4%, from 11% at the end of 2019.
Money managers have hit a regulatory wall due to the increase. They cannot buy more of the most valuable company in India as actively managed plans cannot own more than 10% of a single share. This means that the funds cannot add upward stocks, such as Reliance, and thus risk falling behind the market, said Nilesh Shah, managing director of Kotak Asset Management Co.
“Clients don’t understand this technicality, so it’s difficult to explain to them why a particular fund is underperforming,” said Shah, who is also president of the Mutual Fund Association in India. “The funds have no choice but to record earnings in such cases to comply. We have asked Sebi to allow us to align our positions with changes in the weighting of stocks. “
Apathetic performance has been one of the reasons behind the dwindling popularity of equity funds in recent months, with many people making direct bets in a market that has eliminated most of the virus-induced losses. Large-cap funds have risen 8 percent on average over the past six months, data from the Morningstar Investment Adviser website shows. The Sensex is up 9 percent in the same period.
Shares in Reliance rose 12 percent to a record high last week, pushing the company’s market value past $ 200 billion as people familiar with it said Amazon.com Inc. and KKR & Co. are in talks to buy stakes in your retail business.
But money managers cut their combined holdings in Reliance by 5 million shares worth 10.3 billion rupees in August, making them the best-selling shares by value, Edelweiss Financial Services Ltd. said in a note on Friday.
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