Whalesbook
Mutual fund managers are taking a defensive stance on the information technology sector, even as IT stocks have experienced steep declines over the last 18 months. The sector's share in mutual fund portfolios has dropped to an eight-year low, with funds selling off holdings due to concerns about sluggish earnings, project delays, and the disruptive influence of artificial intelligence.
IT Sector Weight Shrinks
IT stocks accounted for just 6.7% of total equity holdings by mutual funds in April, down 60 basis points from March and 180 basis points from a year earlier, according to Motilal Oswal Financial Services. The Nifty IT index has fallen 36% from its peak in December, highlighting the sector's challenges.
Headwinds Mount
Slowing global demand and cautious client spending have led to fewer deals and stalled project expansions. Major IT firms like Tata Consultancy Services and Infosys have reported weaker earnings, and top companies are expected to show modest revenue growth in the near future. The growing use of AI tools adds to concerns about the long-term sustainability of traditional IT outsourcing business models.
Fund Manager Views
While many fund houses have cut their IT exposure, some have actually increased their allocations over the past year. Nuvama Alternative & Quantitative Research noted that SBI Mutual Fund had the lowest allocation among large fund houses, with its IT exposure at 5.9% in April, down from 6.4% a year ago. Vivek Gedda, a fund manager at SBI MF, mentioned the fund house's consistently low IT holdings, citing uncertainty about AI disruption as a significant factor. He noted that the long-term impact on revenue models and growth prospects remains unclear, though the fund is selectively looking at opportunities given current stock prices.
Seven other large fund houses surveyed by Nuvama also reported less than 10% exposure to the sector. UTI MF, however, held the largest position among these funds at 15.7%, despite reducing its exposure over the past year.