Business cycle investing is a strategic approach that revolves around understanding and adapting to the different phases of the economy and investing according to that. A typical business cycle has four phases: Growth, Recession, Slump, and Recovery.
The first step in business cycle investing is identifying the current economic phase. For instance, a booming economy marked by factory running at full capacities, rising employment demands, and increased discretionary spending signals the Growth phase. Once the phase is identified, the next step is adjusting sector allocations accordingly. Historically, certain sectors tend to excel in specific phases. For instance, during growth phase, financials, consumer discretionary, and metals often perform strongly due to increased economic activity. On the flip side, during a recession phase, sectors like technology, consumer staples, and pharmaceuticals tend to thrive due to their essential nature.
It is also important to note that Business cycle investing is distinct from value investing or special situation strategies. It is a top-down, opportunistic approach focused on macroeconomic indicators rather than individual stock selection based on valuations. By allocating investments based on economic phases, investors can capitalize on long-term opportunities while managing risks associated with cyclical fluctuations.
However, executing business cycle investing is not very straightforward. The difficulty lies in identifying economic phases timely and adjusting portfolios swiftly as delayed actions can result in underperformance. Furthermore, this strategy requires a thorough grasp of different sectors, making it difficult for a lay person to execute the changes with ease. Thus it would be ideal for investors to invest via professionally managed mutual fund offerings based on business cycle investing.
Currently there are around ten business cycle themed funds in the country. Among them ICICI Prudential Business Cycle Fund has been a consistent performer since its inception (January 2021) with an impressive CAGR return of 25.6%. As of April 29, 2024, the fund has delivered an impressive one year return of 52.20% and a healthy CAGR return of 27.35% and 26.29% over two and three years respectively. Thus the fund has outperformed its benchmark returns by 13.22%, 7.03% and 6.33% over one year, two years and three years respectively.
