Reliance Banking and UTI Banking are quite different in their investing strategy.
When one looks at sector funds, there is often not much of a difference amongst peers in the same sector. At least at first blush they tend to appear (deceptively) similar. But dig a little deeper and it's amazing how funds that focus on the same sector can throw up totally different portfolios, investment styles and, consequently, different returns. A look at Reliance Banking and UTI Banking Sector drives home this point. Being sector funds, a concentrated portfolio is a given.
In both cases, it hovers around 15-20 stocks. And a look at their January portfolios reveals that even their top two stock holdings were identical: SBI and ICICI Bank. And both these stocks have been in their portfolios for around three years. But that certainly does not make them similar.
These two holdings accounted for 26 per cent of Reliance Banking's portfolio and 42 per cent of UTI Banking. The concentration of top five holdings has been more prominent in UTI Banking where they form between 60-65 per cent. Reliance Banking is more restrained at around 45-50 per cent. And when you consider the cash holding of Reliance Banking (25.83 per cent in January 2008), it appears that UTI Banking is the more aggressive player. Historically Reliance Banking had been high on cash probably because the fund's AUMs keeps getting huge inflows each month.
So it would probably surprise you that Reliance Banking is the one that positions itself as an opportunistic banking fund. No doubt, it does not shy away from holding huge cash positions but that is because it wants to be in a position to capitalise on great opportunities. For instance, the cash allocation in May 2007 was around 5 per cent. But it jumped up to 15 per cent the very next month. It went higher in July and August 2007 but that was solely due to fresh inflows - the fund's assets swelled from Rs 175.38 crore to Rs 222 crore within a month. This time also Reliance Banking's size has grown from Rs 575.63 crore (December 2007) to Rs 826.48 crore (January 2008).
UTI Banking is most comfortable fully deploying its funds. Reliance Banking's aggression is also manifest in its movement between stocks of various market capitalisations. UTI Banking's investment style may adhere to bold stock allocations, but it takes the well beaten and safe path of large caps. Not so in the case of its peer. Reliance Banking has no qualms of switching between large and mid caps. After remaining a mid-cap fund for most of last year, the fund began to tilt towards large-cap companies from September. Yet, its large-cap holdings are far behind UTI's.
When investing in a sector fund, one should always look at the objective of the fund. The reason being that each fund has its own parameters of what should be included within that sector. So though banking stocks would dominate the portfolios of these two banking funds, they are not the sole occupants. Financial institutions and stock broking firms also find a place here. While UTI Banking tends to lean towards the former (Power Finance Corporation, Shriram Transport Finance, IDFC, HDFC), Reliance Banking prefers brokerages like Indiabulls Financial Services and Motilal Oswal Financial Services which it sold in October 2007. And the financial firm that it has invested in - JM Financial - is certainly not courted by many fund managers. Reliance Banking added LIC Housing Finance in January 2008. Though they both started off with similar AUM of Rs 50 crore, Reliance Banking has raced ahead in size. Probably the first mover advantage helped - it was the India's first banking sector dedicated fund. The financial sector is going great guns. And within it, sub-sectors are also doing well. Banking and broking firms, for instance. But do not blindly invest in a sector fund. Let's say an investor looked at the only two banking funds - Reliance Banking and UTI Banking Sector - in January 2007. Going on the basis of returns and the (wrong) assumption that both funds would be broadly identical, he would have invested in UTI Banking which delivered returns (31.46 per cent) far ahead of its peer (19 per cent). Come January 2008, and Reliance Banking's annual returns for 2007 stood at 76.95 per cent while UTI Banking Sector delivered 66.49 per cent. The point we are making: Besides returns, there is much more that goes into selecting a good fund even when the focus is just one sector. Pick a style you are comfortable with and hang on.
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