Fewer stocks catapult Sensex to highs

Mumbai: The impressive returns generated by Indian equity indices over the past one year was largely on account of strong outperformance registered by just a handful of stocks suggesting that investors in a majority of the index heavyweights had to content with sub optimal returns.

According to a study done by Kotak Institutional Equities, only eight of the BSE-30 index and 17  of the Nifty-50 index stocks have outperformed their respective benchmark indices.

IT bellwether Tata Consultancy Services (TCS) and Infosys, Oil & Gas exploration major Reliance Industries Ltd (RIL),  consumer goods manufacturer HUL, automobile major M&M, Sun Pharmaceuticals and private sector lenders such as Kotak Mahindra Bank and Axis Bank are the eight stocks that have outperformed the 30-share Sensex over the past one month. Interestingly, about 50 per cent of the gains in Sensex have come from RIL, Infosys and TCS.

“As can be seen, only a handful of stocks have contributed to the performance of the index with most lagging the performance of the index. The range of performance of stocks in various benchmark indices is quite large. We see the same pattern repeating across wider benchmarks. The performance of various market indices gets progressively weaker with the ‘breadth’ (number of stocks) of the indices,” it said.

One of the reasons for the strong out performance by a select few stocks in the last one-year was the fact that they were under-owned by a significant section of institutional investors such as foreign portfolio investors and domestic mutual funds.

“In our view, the strong performance of most of the outperforming stocks reflects the market’s changed view of the stocks. The performance of the Indian market in local currency terms has been largely supported by the strong performance of the IT stocks, which in turn have ironically performed as a result of the deterioration in the macro and the resultant sharp depreciation in the Indian rupee,” it added.

The study said most active funds have had low ownership in outperforming stocks like certain consumer and IT stocks and RIL over the past four quarters, making them underperform as against indices.

The sudy also argued against the use of artificial benchmarks as the basis of the active fund industry. “They serve little purpose and result in disproportionate focus of investors on meeting certain relative returns, which at times may not be commensurate with the risk,” it said.