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Citrus Analysis: UTI Mastershare: Getting better with age
Mon, Jul 23, 2012
Source : Sanjay Kumar Singh, Citrus Interactive

UTI Mastershare is a large-cap growth fund that was started in October 1986 (it is the industry’s oldest fund). Currently the fund has assets under management (AUM) worth Rs. 2,261.46 crore, which makes it the 15th-largest fund within the diversified-equity category. The fund has a track record of having paid dividends uninterrupted since its inception.

Currently this fund has 6,66,281 investors -- among the highest in the industry.   

The fund follows a top-down investment approach. It aims to provide its investors consistent long-term returns. To prevent volatility in returns, it avoids aggressive sector bets.

True to its mandate, at any given time more than 80 per cent of the portfolio is invested in large-cap stocks. To contain risk, allocation to any sector is not allowed to exceed 25 per cent, while allocation to a single stock is capped at 7.5 per cent. Since 2009, the fund has avoided active cash calls and allocation to cash is confined to 10 per cent.

Fund performance

Year-to-date the fund is lagging behind its benchmark: it is up 12.52 per cent while its benchmark index, the BSE 100 index, is up 14.04 per cent. Explaining this underperformance, Swati Kulkarni, the fund manager, says: “If you analyse this year’s rally, most of it happened in companies with leveraged balance sheets. Such stocks did well till February but subsequently saw a correction. The fund has stuck to quality names and doesn't have much exposure to highly-leveraged companies. Hence we have taken that small bit of underperformance, but it is likely to get evened out over the long term."

Over the one-year horizon, the fund has given a return of -4.55 per cent, which is better than its benchmark's return of -7.18 per cent.

Over the three-year horizon also, the fund has outperformed its benchmark: it has given a return of 10.03 per cent whereas its benchmark return is 6.55 per cent.

The fund has outperformed its benchmark over the five-year horizon as well: it has given a return of 5.50 per cent whereas its benchmark returned only 2.63 per cent compounded annually.

Calendar-year returns. Next, let us examine the fund's performance over the last five calendar years to see if it has been consistent.

In 2007, the fund gave a return of 62.41 per cent, whereas its benchmark was up 59.75 per cent.

In 2008, the benchmark index fell -55.49 per cent. However, the fund was able to stem its loss at -50.56 per cent.

In 2009, the fund fell behind its index: it gave a return of 71.28 per cent whereas its benchmark was up 80.30 per cent. Kulkarni explains this rare spell of underperformance thus: “If you dissect the 2009 market rally, prior to the elections the markets had already run up 40 per cent. After such a rally, one would typically like to wait for opportunities to deploy cash. We had a cautious approach because the world over there had been a lot of macro-economic turmoil. So we took time investing the cash that we were holding. The election results surprised us, especially the kind of mandate that the UPA government got. After the elections the markets ran up on the expectation that things would start moving on the economic front, and especially that infrastructure-related hurdles would be removed. We had a contrary view and so we underperformed for a short period. We continued to invest in stocks which we thought were not very policy dependent. That has subsequently helped us make up for that underperformance of 2009.”

In 2010, again the fund was back to its winning ways. It gave a return of 18.54 per cent, thereby beating its benchmark’s return of 15.66 per cent.

In 2011, which was a year when the market declined, the fund provided sound downside protection to its investors: it fell only -20.64 per cent whereas the index fell -26.01 per cent.

Thus, the fund has beaten its benchmark four times in the last five calendar years, which is a creditable track record. Over these five calendar years, the fund's margin of outperformance has ranged from 2.66 percentage points to 5.37 percentage points.

Portfolio characteristics

Number of equity holdings. Currently the fund holds 41 stocks in its portfolio, which is marginally higher than the median of 40 stocks for the diversified-equity category.

Over the last five years, the median number of equities in this fund's portfolio has been 47. The stock count has always been in the 40s over the last five years.

Sector concentration. The fund's exposure to the top three sectors in its portfolio is 38.18 per cent, higher than the median of 33.52 per cent for the diversified equity category.

Its exposure to the top five sectors is 46.66 per cent, almost at par with the median for the diversified-equity category (46.75 per cent).

The fund's exposure to the top 10 sectors in its portfolio is 68.77 per cent, marginally higher than the median for the diversified-equity category (67.60 per cent).

Thus, the fund's concentration to the top sectors in its portfolio hovers around the median mark for the diversified-equity category.

Company concentration. The fund's exposure to the top three companies in its portfolio is 19.12 per cent, marginally higher the median for the diversified-equity category (19 per cent).

Its exposure to top five companies is 29.49 per cent, again marginally higher than the median for the category (28.60 per cent).

Its exposure to the top 10 companies in its portfolio is 49.15 per cent, higher than the median of 46.86 per cent for the diversified equity category.

Thus, the fund's exposure to the top three, five and 10 companies in its portfolio is marginally higher than the median for the diversified equity category.

Turnover ratio. In June the fund had a turnover ratio of 16.59 per cent, which was much lower than the median of 74.5 per cent for the diversified-equity category.

The fund has always had a low turnover ratio: the average turnover over the last five years has been 24.36 per cent.

That the fund manager has managed to fetch good returns while engaging in such a low degree of churn speaks highly of her stock-picking skills.

Expense ratio. The fund has an expense ratio of 1.67 per cent, which is much lower than the median of 2.34 per cent for the diversified-equity category of funds. The fund’s low cost is a positive for investors.

Risk measures. The fund has a beta of 0.8247, which is higher than the median for the diversified equity category (0.8061).

It has a standard deviation of 1.0801, which is again higher than the median of 1.0470 for the equity diversified category of funds. Thus, the fund’s level of risk is marginally higher than the median for the category.

Risk-adjusted return. The fund has a Sharpe ratio of 0.0297, higher than the median of 0.0288 for the category. It has a Treynor ratio of 0.0388, which is again higher than the median of 0.0367 for the diversified-equity category. Thus, on measures of risk-adjusted return, the fund fares better than the category median.

This is significant. Even though the fund's level of risk may be higher than the category median, its risk-adjusted returns compensate for the risk.

Portfolio strategy

2011. In 2011 the markets declined: while the Sensex fell -24.83 per cent, the mid-cap and the small cap index suffered larger declines, falling -34.78 per cent and -43.62 per cent respectively. While the fund's benchmark, BSE 100, fell -26.01 per cent, the fund declined only -20.64 per cent.

The fund's predominantly large-cap exposure, which averaged 89.48 per cent during the year, helped in arresting its fall (since these stocks fell less that year). Exposure to mid-caps averaged only 5.34 per cent during the year. Exposure to cash rose from 0.93 per cent at the beginning of the year to 7.64 per cent by October, before falling a little to 4.65 per cent by the end of the year.

In 2011 only the BSE FMCG index turned in a positive performance (9.27 per cent). All the other sectors gave negative returns: BSE Healthcare (-13.20 per cent), BSE IT (-15.62 per cent), BSE Teck (-16.52 per cent), BSE Consumer Durables (-18.13 per cent), and BSE Auto (-20.30 per cent).

During this turbulent year, the fund manager raised her exposure to Pharma (from 5.61 per cent to 8.39 per cent), cigarettes and tobacco (4.67 per cent to 5.98 per cent), cement and construction materials (3.41 per cent to 5.25 per cent) and oil exploration companies (2.79 per cent to 4.69 per cent).

She cut her exposure to IT software (13.15 per cent to 10.42 per cent), banks (marginally to both public and private sector banks), and refineries (8.97 per cent to 7.54 per cent).

By the end of the year, the fund was overweight vis-a-vis its benchmark on pharma, cement and construction, oil exploration and gas transmission and marketing companies. It was underweight on private banks, public banks, and cigarettes and tobacco. It was equal weight on IT software and refineries.

2012. Year-to-date the fund is up 12.52 per cent. It is lagging behind its benchmark, BSE 100 index, which is up 14.05 per cent.

This year the BSE Mid-cap (up 21.67 per cent) and the Small-cap index (21.39 per cent) have both outperformed the Sensex, the large-cap index (up 11.38 per cent).

This year the fund’s allocation to large-cap stocks has ranged from 87.96 per cent in January to a high of 91.62 per cent, and currently stands at 89.15 is per cent. Exposure to mid-caps has ranged from 4.61 per cent in January to 6.58 per cent in June. Exposure to small-cap stocks is miniscule. Exposure to cash stood at 4.91 per cent at the beginning of the year and had been pared to 1.78 per cent by June. Its exposure to deposits has hovered around 2.46 per cent since the beginning of the year.

Year-to-date, rate-sensitive sectors have outperformed: Bankex (33.09 per cent), Realty (25.41%), and Capital Goods (24.63 per cent). The defensive sectors have trailed behind: FMCG (21.67 per cent), Healthcare (18.06 per cent), and Consumer Durables (17.91 per cent). Currently the fund’s top allocations are to private banks (14.23 per cent), IT-software (9.02 per cent), Pharma (8.60 per cent), refineries (7.83 per cent), cigarettes and tobacco (6.98 per cent), and cement and construction materials (5.55 per cent).

The fund is overweight compared to its benchmark on Pharma, cement and construction materials, and gas transmission and marketing companies. Says Kulkarni on the outlook for these sectors: “From the portfolio perspective investing in pharma is a defensive call. Moreover, these companies are expected to show decent growth in earnings as they have done in the past. As for the cement industry, it is highly consolidated and companies here have shown regularity in earnings. Their balance sheets are strong with low debt and they are all high dividend yielding companies. The supply glut that was feared in this sector has not happened because it is taking time for new capacity to come on-stream. Furthermore, as interest rates come down, both the infrastructure and the real estate sector will pick up. Hence, despatch growth is likely to be higher than in the last two years.”

The fund is currently underweight compared to its benchmark on IT-software, banks (both public and private sector marginally) and engineering and construction companies. According to the fund manager, “The outlook for the IT sector is mixed, with currency depreciation compensating for slowdown in the business. So I shall maintain the underweight position. As for banks, we are increasing our exposure to private-sector banks on corrections. Margins are likely to be stable, though on a sequential basis there could be a slight decline. Net interest income is expected to grow at 15-20 per cent. Profits are likely to be better this year due to last year’s low base. This is one sector where the fund could increase its exposure. As for the engineering and construction sector, much will depend on how the investment cycle picks up. We would like to see some growth in order book before we increase our position in this sector.”

Fund manager

Swati Kulkarni has been managing this fund since December 2006. She manages several other funds also such as UTI MNC, UTI Dividend Yield Fund, UTI Long-Term Advantage and UTI Top 100. Of these UTI Dividend Yield Fund is another high performer.  

The fund manager attributes UTI Mastershare’s sound performance to two factors. One, she says, for the last five years the fund has stuck to its mandate religiously: it has not reduced its large-cap exposure below 80 per cent and has eschewed aggressive sector bets which, in her view, has the potential to make returns volatile and erode the wealth that has been generated.

Two, she attributes the fund’s success to the fund house’s processes, which she says are both detailed and collaborative. She takes her calls based chiefly on internal research. The investment team at UTI MF currently consists of five fund managers, eight analysts (with six to seven years of experience), and two freshers.

A steady and sound performance, a conservative investment approach that eschews aggressive bets, low churn, and a low expense ratio – these are the hallmarks that make UTI Mastershare an ideal pick for your core portfolio.

You may contact the author on sanjay.singh@citrusadvisors.com
 
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