The Hindu Business Line : ‘Going for growth stocks worked well for us’

UTI Mastershare, one of the oldest equity funds in operation (launched 1986), has rejigged its portfolio to reflect a ‘growth’ orientation. Fund Manager Ms Swati Kulkarni talks to Business Line on the outlook for markets and sectors and why the fund, despite its equity orientation, has maintained its almost ritualistic dividend payouts over the past 21 years.

Mastershare has improved its performance quite sharply in recent months, with one-year returns looking up significantly. What sector and stocks picks have contributed to this?

Broadly, addition of a growth style to the portfolio that was earlier dominated by a ‘value’ orientation has really worked well for UTI Mastershare in the past one year. While adding growth stocks, we retained exposure to promising value stocks also. Stocks in power equipment, capital goods, telecom and new private banks sector were experiencing earnings growth in the range of 30-50 per cent, much higher than the overall market. This growth was observed to be sustainable as well; hence we added exposure to these stocks.

Similarly, value stocks in sectors such as power utilities, mining, and metals were trading at rock-bottom valuations, at a significant discount to the market; hence we decided to stay invested in these. Our decision to stay underweight in IT, consumer, oil and gas, pharmaceuticals and the auto sector has worked well for the fund.

Mining and banks were top sector exposures with this fund in November. What is the rationale for these choices?

To sustain the growth momentum in the economy, we see investments being planned in mining. The government recently allocated coal blocks to various public/private organisations. Also, upstream metal companies are strengthening their integrated operations by securing raw material supplies to stay globally competitive. The companies that we like in this space are those that are transforming into integrated corporations. They are also trading at attractive valuation.

Quarterly results for banks have exhibited a pressure on net interest income growth mainly as deposits got re-priced and credit growth, particularly on the retail side, slowed. However, we are positive on banks with a long-term perspective. Banks are well-poised to capture the investment and consumption-led growth of the economy. Interest rates are also expected to stay softer going forward, which is beneficial for banks. The growth in fee income from non-fund based activities is another advantage. Compared to the regional peers, Indian banks, especially state-owned ones, were trading at attractive levels.

Though Mastershare has scaled up its dividend payouts in line with rising stock market returns, it still remains fairly conservative on its payouts (35 per cent in 2007). Is there a case for bigger payouts in years of exceptional performance and smaller ones/no payouts in bearish years?

Most of our investors look forward to a regular dividend distribution which usually coincides with the festive season. The quantum may vary depending on the market conditions, but our endeavour is to declare regular dividends. The actual return, including the appreciation in NAV, could be much higher than the dividend distributed in a bull market. Last year, the scheme returned in excess of 60 per cent.

Despite its consistent dividend track record, UTI Mastershare’s overall performance over three- and five-year time frames is below category average (with returns of 38 per cent and 40 per cent, respectively). Is the focus on dividend payouts weighing on overall returns?

UTI Mastershare is positioned as a conservatively managed large-cap oriented fund that restricts exposure to any sector to about 20 per cent and maintains a well-diversified portfolio. It is possible that in the past, when small and mid-cap stocks got re-rated, the fund remained invested (in line with its positioning) in the large-cap space. This has provided steady/less volatile returns rather than lumpy returns possible from an aggressive strategy.

The rally from 10k to 20k has been led mainly by large-cap and index stocks that make up the portfolio of this fund. Will 2008 bring greater participation from mid and small-caps?

Select stocks in the Sensex contributed to the rise. Investment in such stocks has, to an extent, helped the fund, but the performance enhancement also came through our stock and sector preference and about a 20 per cent exposure to the non-index mid-cap stocks.

The size of the fund may restrict meaningful investments in small-cap stocks. But we have invested in mid-cap stocks.

Going forward, we would certainly look for bottom-up ideas without any bias to capitalisation.

PE multiples for the Sensex and Nifty stand at about 19 times forward earnings at this juncture. Would you view this as a demanding valuation?

Considering the future growth in earnings, embedded value and the relative attractiveness, I would rate current levels as fair. I expect that as long as earnings growth is supportive, equity-oriented funds will outperform other asset classes.

Even though the overall market valuation may look fair, the focus is on investing in specific stocks that are available at attractive valuation, considering growth potential.

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