AMC Speak 17th October 2014
27 continuous years of annual dividends
Swati Kulkarni, Executive VP & Fund Manager, UTI MF
 

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UTI Mastershare has its loyal set of investors, who have been rewarded with annual dividends continuously for the last 27 years - through all the ups and downs of different market cycles. What does Swati need to do to ensure this? Is portfolio churn very high to generate distributable surplus? How is Mastershare managed? Read on as Swati takes us through the fund management style and philosophy of one of India's oldest equity funds.

WF: There is a general perception that the "Modi factor" has now got priced into the market. Going forward, what are the triggers that you see sustaining this market? Are you seeing evidence of earnings momentum picking up or are we still only hoping that it will pick up soon?

Swati Kulkarni: Earnings have clearly bottomed out - downward revision has definitely bottomed out. Last quarter, we got a double digit growth. This quarter also I think the expected growth year on year is closer to 15% and for FY16, the consensus growth estimates are closer to 16% to 17%. I think there is sufficient evidence of earnings growth momentum now beginning to pick up. What also tends to happen is that when evidence of momentum is more visible, you will see a round of earnings upgrades from equity analysts.

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WF : The fund industry's attention over the last 12 months has been very sharply on the mid and small caps spaces. In this context, what are the key factors that are influencing your preference for large caps?

Swati Kulkarni: First of all we have positioned all our funds in different baskets. We have clarity and transparency when it comes to sharing information and managing expectations. So from that perspective Mastershare will always be 80% large cap and 20% mid cap kind of fund.

Now, talking about large caps vs midcaps, yes I think last one year midcaps have caught up but that's also after a very poor performance. On a one year basis, they stack up well, but on a 3 year basis, they are still playing catch up. Midcaps are also prone to more volatility than largecaps and at present the valuation gap has narrowed too much, making midcaps look a little expensive on a relative basis.

That is not to say that midcaps do not have a good long term story - they certainly do. When an economy is recovering, midcaps offer strong growth prospects. When you compare large caps and midcaps, the risk is lower in large caps mainly because they are more resilient business models and have scale to ride through economic cycles.

As far as Mastershare is concerned, we will stick to an 80% large cap allocation and a 20% midcap allocation.

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WF : For UTI Mastershare, you seem to prefer a top down approach, even as many fund managers argue that India is essentially a bottom up story. Is a top down approach more suitable in the large caps space?

Swati Kulkarni: This again is a function of fund positioning. Mastershare adopts a more top down approach whereas UTI Opportunities is more bottom up driven, within the large caps space. In Mastershare, its more top down as we tend not to deviate too much from the benchmark's sectoral allocations. So, while we may pick entirely different stocks within a sector as compared to the benchmark, the overall sectoral weightage will be reasonably close to the benchmark. We do take active positions at a sectoral level too, but it won't be too large a deviation.

WF: It is said that large caps are well researched and closely tracked, thus offering very limited alpha generation potential. Globally, the large caps space is seeing increasing flows into low cost passive index trackers. How do you see the large caps space evolving from a fund management perspective in India?

Swati Kulkarni: I think at least in India the large cap benchmark has been beaten by actively managed funds across time periods. Even in large caps there are still opportunities to make money because typically market throws some anomaly and there could be surprises on the earnings also. So your estimation and your analysis also have a say. While it is correct that the large caps are researched well that also means there is lower risk in terms of negative earnings surprises and suspect business models.

You invest in leaders which also brings down the volatility in the NAV behavior. So from that perspective yes you will not have a totally under research exposure in this fund. But we are also positioning this fund for people who are looking at equity exposure which is not very aggressive. So it is in line with the positioning. Further, even within sectors, stock selection continues to be a significant factor influencing your alpha generation.

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WF : You are currently underweight in financial services and auto sectors - both of which have been strong market favourites in recent months. What is the rationale for this stance?

Swati Kulkarni: As far as financial is concerned I am overweight on private sector banking and under weight on psu banks. PSU banks will need to be recapitalized and asset quality is still a concern in some cases. So, it doesn't make sense to have too much exposure in this space.

In auto, while our allocation looks underweight, our effective allocation is overweight. We have exposure to industrial manufacturing companies which are classified as such, but which actually are major suppliers to auto ancilliaries and are therefore direct beneficiaries of growth in the auto segment.

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WF : Mastershare's consistent dividend track record has attracted a loyal set of investors. How important do you think is an annual dividend for investors in India? What changes do you need to make in your fund management style (as compared to other funds you manage) to ensure creation of an adequate distributable surplus each year?

Swati Kulkarni: Actually the portfolio turnover is very low - its only 25%. We've never really had to resort to profit booking only to generate distributable surplus for dividends. We have been fortunate that we have been able to maintain a track record of annual dividends for 27 years. Its easier in markets like these, but is more challenging in downturns.

Mastershare has a large set of old investors who have stayed invested through several years. For them, an annual dividend is a welcome additional income. While there can be no guarantee on giving out dividends, I suppose a 27 year unbroken track record does give comfort to them.




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