Insights

“Our preference for under-levered companies helped us in economic downturn”

May 9, 2014 . Vidya Bala

 UTI Mutual’s diversified basket of fund offerings also provides interesting exposure to themes such as dividend yield and MNC. Many of these funds benefited from the consumption wave of the past few years. But with the tide turning now, what is the fund house’s strategy with sectors and the market? We have an engaging interview with Swati Kulkarni, Executive Vice President and Fund Manager – Equities, UTI Mutual on the AMC’s take on the current scenario and how the portfolios are gearing up  for any changes.

swati

 Has the recent rally in the last 6 months taken you by surprise and are you comfortable with market valuations, given the prospects or lack of it?

Given the Macro improvements and the below average valuation of the BSE Sensex at 20,200 or so in Feb 2014 (one year forward Price Earnings multiple as per the Bloomberg Consensus), we were positive on equity markets.

We still remain positive on the equity markets as the market trades at an historic average level and the economy is gradually coming out of the bottoming phase.

How growth spans out from here on depends on how the investment side of the economy gets a boost from progress on the stalled projects through speedy clearances, removal of bottlenecks, etc. and attracts fresh investments.

As a fund house strategy are you orienting your portfolio towards sectors that will benefit from recovery? If so, what are they?

Cyclical sectors like Auto. , engineering goods, cement, metal  and construction  have experienced sluggish demand. The capacity utilization levels of many players in these sectors are at sub optimal levels. So, if the demand picks up with economy, the margins can expand as the fixed costs get apportioned over growing volumes.

We are overweight on auto and cement in certain diversified funds and we are looking to add engineering Goods companies with strong franchise at reasonable valuations.

Would you be comfortable with companies with some debt at this point in time, if growth prospects look better?

Our preference for under levered companies helped us in economic downturn. On the expectations of gradual pick up in the economy, we are selectively adding companies with debt by considering such companies which are backed by assets, and have avenues to improve cash flows.

Also, we expect interest rates to remain at the current levels over the near term, given the glide path led by the RBI – of CPI of 8 per cent in January 2015 and 6 per cent by January 2016 – and the pressure on price levels due to crop damages post unseasonal rains besides the possibility of below normal monsoon on probable ‘El Nino’ conditions and fuel pass through.

Dividend yield as a theme and your fund underperformed last year. Why was it so? What is your strategy in the fund and do you think this theme can see a pickup in fortune now? 

During the calendar year 2013, low dividend yielding stocks outperformed the high dividend yielding stocks, across market capitalization segments. The high dividend yielding stocks from sectors such as energy, metal, cement, industrial manufacturing, PSU banks underperformed.

On the other hand, the sectors which were rerated and hence had a few high dividend yield stocks such as pharma , FMCG and private sector banks outperformed.

UTI Dividend Yield Fund continued its investment mandate to invest at least 65% of the portfolio in high dividend yielding stocks that have reasonable valuation and sustainable cash flows. The investment strategy is useful in selecting good quality stocks, at attractive price, that have earnings growth potential with strong sustainable cash flows.

To that extent the fund has a growth and value blend. It is likely that over specific one or two year periods this category of funds can underperform however, over a longer period say five or seven years almost all funds in the category have outperformed the benchmark.

We think that the theme can pick up as the sectors and stocks that have high dividend yield get investors’ attention – one, due to structural changes and two on improving operating environment and three due to the attractive valuation.

For example, the key exposure of PSU oil and gas Stocks can benefit from the recent policy measures that are likely to reduce the under recoveries. This can improve their earnings as also the valuation as the sector is currently valued at a discount to regional peers.

Our exposure in industrial manufacturing and cement sectors can benefit from the operating leverage as the demand improves.  IT overweight is expected to benefit from the improving operating environment. We have been adding exposure to mid cap stocks wherever the valuation is below the industry average /historical average and the earnings growth is also reasonable.

The idea is to keep the large cap allocation between 65-70 per cent (current at 72 per cent) and increase mid cap allocation to 30-35 per cent in order to position the portfolio to participate in economic cycle improvement.

 MNC themes did well at a time when markets valued ‘cash rich’ companies to their debt-laden counterparts. Will this theme hold ground if the domestic ‘growth’ story revives?

UTI MNC Fund endeavors to maintain a diversified portfolio. While we maintained the focus on consumption theme during the last 5 years, we have started to add exposure to domestic cyclicals such as cement and engineering sectors to benefit from the likely focus on investment side of the economy.

In the short term though, since the universe of listed MNC companies in sectors such as construction, financials, media, metals etc. is limited, one may not be able to fully participate, if there is a rally in these sectors.

The advantage of MNC Fund is that one gets an exposure to the companies which can benefit not only out of the domestic recovery but also out of the export potential as the companies can produce at competitive rates in India due to economies of scale and lower cost structures.

Typically the MNC companies enjoy strong leadership position due to their ability to spend on brand building,   distribution expansion, and product development. They have strong balance sheet and cash flow generation and better pricing power. These characteristics make these companies less volatile which reflects in their lower beta.

We think that the investors can allocate about 5-10% of their equity allocation to this Fund/ theme with a long term investment horizon.

What are the sectors that UTI is overweight on at this point in time and why?

We are overweight on Cement and IT stocks and select Auto stocks for reasons elaborated above.

 

Disclaimer:

The sector(s)/stock(s) mentioned here do not constitute any recommendation of the same and UTI Mutual may or may not have any future position in these sector(s)/stock(s). Past performance may or may not be sustained in the future. The portfolio of the schemes is subject to changes within the provisions of the Scheme Information document of the schemes. Please refer to the SID for investment pattern, strategy and risk factors.

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