Fund Focus: UTI Mastershare
Initial investment: Rs. 10 lakhs. Dividend reinvested: Rs. 6.98 crores
Swati Kulkarni, Executive VP & Fund Manager, UTI MF
24th October 2016
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In a nutshell
UTI Mastershare has paid out dividends in every year of its 30 year track record. While that in itself is a laudable achievement, what's even more impressive is the sheer magnitude of long term wealth creation. If an investor had invested Rs. 10 lakhs in UTI Mastershare at its inception, his reinvested dividends over the years would have aggregated to Rs. 6.98 crores today!
Swati takes us through this style pure, conservatively managed large cap fund and its performance in recent years. Being large cap focused is perhaps the best position to be in today, Swati believes, as midcaps are looking clearly expensive. On a trailing 12 month basis, the BSE Midcap index now trades at 33x vs 21x for the BSE Sensex.
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Click here to know more about percentiles and the colour codes
What do percentiles and their colours signify?
Fund performance is typically measured against benchmark (alpha) and against competition.
Performance versus competition is measured through percentile scores - ie, what
percentage of funds in the same category did this fund beat in the particular period?
If a fund's rank in a year was 6/25 it means that it stood 6th among a total of
25 funds in that category, in that period. This means 5 funds did better than this
fund. In percentile terms, it stood at the 80th percentile - which means 20% of
funds did better than this fund, in that particular period. If, in the next year,
its rank was 11/26, it means 10 other funds out of a universe of 26 did better than
this fund - or 38% of funds did better than this one. Its percentile score is therefore
62% - which signifies it beat 62% of competition.
Most fund managers aim to be in the top quartile (75 percentile or higher) while
second quartile is also an acceptable outcome (beating 50 to 75% of competition).
What is generally not acceptable is to be in the 3rd or 4th quartiles (beating less
than 50% of competition). Accordingly, we have given colour codes aligned with how
fund houses see their own percentile scores. Green colour signifies top quartile
(percentile score of 75 and above), yellow or amber signifies second quartile (percentile
scores of 50 to 74) and red signifies 3rd and 4th quartile performance. A simple
visual inspection of colour codes can thus give you an idea of how often this fund
has been in the top half of the table and how often it slips to the bottom half.
A great fund performance is one which has only greens and yellows and no reds -
admittedly a tall ask!
WF: UTI Mastershare has a long track record of alpha generation and broadly a 2nd quartile performance within the large cap funds space - which is a sound positioning for a long term investment. In CY 2015 and YTD 2016 however, performance has lagged peers though alpha generation continues to be positive. What factors do you think are coming in the way of an enhanced performance and what steps are you taking to improve positioning vs peer group?
Swati: Our observations are that the difference in returns from the median are very small for the 2015 and YTD performance, though in terms of the ranks it may look in the third quartile. UTI Mastershare has always remained style pure; allocation to large cap stocks on an average has been maintained above 80% of the Fund. Peers in the large cap category may have varied large cap allocation between 70-90%; in an environment where mid and small cap segment has given substantially higher return than the large cap segment it is possible that the large cap funds with lower allocation to large caps may have delivered a better performance. The returns are competitive vs the funds that maintain large cap allocation above 80% over 3 years.
Also, UTI Mastershare invests in long term structural opportunities and does not chase momentum. We have remained underweight on metals particularly Ferrous, as we believe, there is a structural issue given the threat of exports from China post its shift from investment led economic growth to consumption led and the companies may not have pricing power though in the recent times the sector has largely done well post the protection by way of MIP. Our underweight call on Metals has temporarily affected the YTD performance (as Metals is one of the best performing sector) though on a three year basis that has helped in generating alpha.
We believe UTI Mastershare has a sound positioning as 'a style pure large cap fund with conservative investment style (prudential investment limit of maximum of 7.5% for a single stock, 30% for a single sector and 50% for the top 10 holdings) with consistent and reliable track record.'
WF: UTI Mastershare has an enviable track record of consistent dividend payouts. Is this a major attraction for retail investors? Do you consciously book profits regularly to maintain this payout track record?
Swati: It has given dividend every year so far, irrespective of the market condition. For a class of investors who have very high allocation to fixed income generating assets, regular dividend may be a comforting factor. But the wealth generation of Rs.6.98 crores by the investor of UTI Mastershare, by reinvesting all the dividends received on his or her initial investment of Rs. 10 lakhs is far more attractive proposition as it demonstrates the importance of long term alpha generation and the effect of compounding on one's savings.
Profit booking by the Fund is more driven by factors such as, what is the future return potential, earnings growth expectation vs the valuation, changing sector trends etc. I think that the investment philosophy to invest in quality companies with strong operating cash flows with higher return on capital has also helped in maintaining the dividend track record.
WF: Global concerns around China, US rate hikes and stress in European banks are causing another round of volatility in our markets. What is your reading of the global situation and in what ways are you steering your portfolio in light of the unfolding global context?
Swati: These global issues can trigger volatility, more so if they turn out beyond market expectation. Also Indian markets are correlated with global markets so risk aversion trends can affect Indian equity in the short term. UTI Mastershare portfolio is geared toward domestic cyclical recovery; hence we expect that these global issues could have a limited impact on the portfolio.
WF: Is the domestic growth story really panning out the way we have been expecting? How do you see earnings momentum picking up? Do you have any concerns on the domestic growth story?
Swati: In general the market expectations of the earnings growth got revised downwards in last 3-4 years, as the commodity prices slumped, demand turned lackluster and the banks credit cycle worsened. The pace of downgrades in earnings growth expectations has now come off, which is a positive sign. We expect firm earnings growth trends emerging from the second half of FY 17 gaining momentum in FY 18.
Consumption alone cannot sustain the economic growth, investment side through manufacturing, infrastructure need to support. So sustenance of domestic economic growth over the medium term hinges on growth in investments. For higher economic growth, the private capex needs to pick up. Government too has a limited elbow room to increase the capital spend given the fiscal constraint and FRBM resolve. Crude oil and other commodity prices have remained benign; any surge may alter Govt.'s ability to spend.
WF: Large caps have lagged mid and small caps considerably in recent times. What is keeping large caps back and what factors do you see potentially changing this equation?
Swati: Large portion of MF flows have gone into mid and small cap segment in past 2 years. Companies which are showing steady earnings growth trend have got rerated. On trailing 12 months , S&P BSE Midcaps is trading at 33 times vs S&P BSE Sensex at 21 times. The growth expectations are running too high in mid and small cap segment in order to justify the valuation premium. We believe as the economic growth picks up the earnings growth differential will narrow and investors could give preference to attractive valuation of large caps.
WF: Which themes/sectors do you see offering the greatest value now, in terms of strong growth prospects that are still reasonably priced / undervalued?
Swati: We are positive on Private sector retail banks, NBFCs, Automobiles, Industrial Manufacturing, Cement sector and maintain an overweight position there. UTI Mastershare follows GARP; we believe that these sectors will have better growth potential in initial phase of domestic economic recovery through higher top line growth and operating leverage benefits. Valuations look reasonable considering this expectation. The near term growth has moderated for IT and Healthcare sector as also their valuations compared to the historical trends. Hence, we have a neutral stance on these sectors. We are underweight on Metals and staples.
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