Srividhya Sivakumar

With the primary market beginning to look up, it may only be a matter of time before the Government revives its divestment plans for select public sector companies. Perhaps in anticipation of this move, Baroda Pioneer Asset Management Company has launched a new fund — Baroda Pioneer PSU Equity Fund. This fund will invest primarily in state-run companies across sectors and market capitalisation categories. In terms of asset allocation, the fund will invest a minimum 65 per cent of its total assets into equities and related instruments, with the rest allocated to debt and money market instruments.

The fund seeks to identify investment opportunities based on government policies towards sectors. It may also invest in public offers of such companies, including rights and follow-on offers. The fund will close on September 24.

Investment Argument

The investment universe of PSU stocks is spread across sectors such as infrastructure, capital goods, oil and natural resources, technology, banking and fertilisers, many of which enjoy a dominant position. Investing in PSUs could, therefore, provide investors a proxy play on the economy. PSU stocks are also, in many cases trading at a valuation discount to private players, with the PE of the BSE PSU index at 20 times against 23 times for the Sensex.

The key arguments for investing in PSUS are their historic cost advantage, wage costs, absorbed technologies, and debt levels. Return ratios, if not higher, are comparable with the private sector; these have remained healthy especially in sectors such as power and banking.

State-owned companies are also known to have high-dividend payout ratios. Notably, PSUs have also emerged as more resilient players in the economic downturn of 2008, when they outperformed private sector players in revenue and earnings growth. It may, nonetheless, require investors to adopt a long-term approach.

For the conservative

The fund may, however, be best suited for conservative investors, as PSU stocks typically tagged ‘defensives' have exhibited only a limited participation in protracted market rallies. For instance, from the March 2009 lows, while the BSE PSU Index has returned about 120 per cent, the Sensex and BSE-500 have delivered 140 per cent and 170 per cent respectively. This tendency to trail broader markets could, therefore, cap fund returns.

Besides, in terms of valuations, PSU stocks, especially from banking and power sectors have already undergone significant re-rating. This may leave little scope for further upside at this juncture. Thus, the opportunity for this fund may primarily hinge on new listings.

To their credit PSU stocks offer a good refuge to investors during falling markets; the PSU index limited its losses in 2008 to 49 per cent, while Sensex and the BSE-500 fell by about 51 per cent and 57 per cent respectively. These go to make PSU stocks a defensive addition to an investor's portfolio. Having said this though, the question is whether investors need to own a fund that invests exclusively in PSU stocks. The more attractively valued PSU bets can and do already form part of the diversified fund portfolios. Limiting the investment universe to PSUs may restrict the fund manager's ability to pick the best stocks at different points in time.

Peers

There are three more funds — Religare PSU Equity, SBI PSU and Sundaram BNP Paribas PSU Opportunities — that invest in PSUs. If one goes by their portfolios, they are tilted towards financials and energy sectors — of which banking stocks outperformed while oil and power stocks dragged down performance.

Baroda Pioneer AMC has few equity schemes in its kitty — though only three with AUMs in the Rs 20-55 crore range. Baroda Pioneer Growth Fund has turned in an impressive long-term performance. Dipak Acharya, who manages the existing equity funds, will be the manager for this fund too.

(This article was published in the Business Line print edition dated September 19, 2010)
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