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Fund managers see more value in software

Sep 4, 2000

A lot of people turned very pessimistic of software stocks after the huge correction in the markets in March-April. Investors dumped these stocks and exited from software in hordes. However, fund managers continue to see value in software even at current levels. Most diversified growth funds continue to have over 30% allocation to software with some still showing over 50% exposure. This seems to indicate that fund managers continue to find a lot of growth potential in software, regardless of the TMT shock in March. This is also the conclusion that we reached in the course of our interviews with various personalities from the mutual fund industry.

For instance, when we at asked Shyam Bhat (fund manager Tata Mutual Fund), about his choice of sectors, he had this to say: I continue to remain bullish about the IT sector. The results of 1QFY2001 have shown that software companies are able to maintain their growth rates. And we expect these companies to be able to maintain these rates over the next couple of years. The PEG (price earnings to growth) has come down dramatically for these companies. Moreover, the rupee depreciation will benefit software exporters.

In our interview with Mr Nikhil Khatau, (CEO of Sun F&C Mutual Fund) we asked him if there was some kind of a consensus about software valuations. To this he replied by saying: I dont think you can give a macro view on the tech sector. There are some companies in the sector with very high (price to earnings) P/E ratios and limited growth potential, while there are some other companies with low P/Es and a lot of potential. These companies need to be differentiated.

Krishnamurthy Vijayan (CEO of JM Mutual Fund) opined that given the growth potential of software, even other attractive sectors like FMCG get dwarfed, and unfortunately are always benchmarked against software all the time. Consequently software stocks always draw a larger fan following (vis--vis FMCG) in fund portfolios.

Regardless of its potential, software stocks are subject to a lot of volatility as was more than evident in the aftermath of the correction on NASDAQ, which was promptly reflected on the local bourses. So while mutual fund investors have no two opinions about the growth potential of software stocks, the accompanying volatility is something they can well do without.

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