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Themes Take A Backseat

Anoop Bhaskar, Head Equity, UTI Mutual Fund, says that investor preferences have moved away from thematic funds

Anoop Bhaskar, Head Equity, UTI Mutual Fund feels that investors should look at market levels from where the probability is of making money on a one-, three- and five- year basis. With over 16 years of experience, he shares his views on the market and how investors should evaluate their entry.

Getting onto your specific funds, UTI Equity - what have you done strategically in this fund since you took over?
Since August 2007, the fund has been realigned to a new investment allocation strategy - flexi cap, with a minimum allocation of up to 70 per cent in large caps and the balance in mid and small caps (with small caps not exceeding 10 per cent of the portfolio). It is positioned as a flexi-cap product which invests across market segments. We have tried to define how much we would invest in each of those segments at various points of time in the market and we have stuck to that.
Secondly, on the stocks, we have tried to buy companies which we believe have a high level of operating efficiency, or competitive advantage, with a balance sheet which is either superior to competition, ors has a fair chance to improve significantly in the future. We try not to buy companies, though we make those errors from time to time, which are more of a sector bet where the inherent operating efficiency of the company is low but because the sector is poised to do well, thus those companies will move with the sector as such. That’s been one part of the strategy where we have got wrong a few times and that is something we would like to avoid in the future by focusing only on good operating efficiencies. The bias is towards buying growth at reasonable price.
However, there are some assets which are priced at levels which are not rational, but the companies have demonstrated in the past, a very strong track record to generate earnings and sustain earnings growth at good levels. So, companies like Bosch, HDFC Bank, Nestle or Sun Pharma have built businesses which are fairly well protected, where they have some purchasing power, superior management quality and depth, though not priced attractively or cheaply, they are the kind of companies that you would want to own for long periods of time. would also fill it with companies where we want to take some tactical calls from time to time.

UTI Mid Cap - what are you doing here and when will it actually start showing results?
The fund did reasonably well and was in the first quartile from January 2010 till around May 2010. From June to September it lagged its peer group because it had a 12 per cent weight in Banking versus the 20 per cent in the benchmark and we missed out the rally in PSU bank mid caps and NBFCs which did very well during that period.
To make matters worse, we were overweight on Construction, which we thought was cheap and where valuations were attractive. They unfortunately became much more attractive by the time we were considering an exit.
The combination of these two factors led us to underperform by almost 600 to 800 bps versus our peer group and that is something which shows in our performance versus the peer group.
We rectified the portfolio in December 2010. Construction is reduced significantly from the level we had touched at the start of the year; being underweight on banks has helped us in the last three-four months as Banking has, especially the mid-cap PSU banks, got hit quite significantly.
So, on a three- and six-month basis, which is not the right period to look at, but just for reference sake, the fund has improved its performance. Though not the leader in that segment, it has improved its positioning from being at the bottom of the third quartile to at least second quartile. We have tried to take small positions in stocks which we thought we will build up over a period of time but because of our lack of speed or the stocks outperforming in a much shorter period, we were not able to build on those positions. We bought a few NBFCs and we have also bought a few banks in the last few months because of valuations being fairly cheap and attractive. And we’ll try to improve performance by taking some tactical calls which would lead to slightly higher portfolio turnover in the next one year.

How difficult it is to manage a high quality mid-cap portfolio?
I think more than managing a mid-cap portfolio where you don’t get inflows is that a lot of these stocks tend to move in fits and starts. If you have a steady stream of inflows, the new money can be deployed in new ideas. If the flows are reverse, you have to continue selling the more liquid names which also could tend to be the more profitable names and you will have to churn the portfolio much more to rebuild the portfolio in every six-seven months to identify further new targets that have to be identified.
We now have a dedicated mid-cap resource to work on ideas. He is able to do lot of ground work which I otherwise would be unable to take time out for. This helps in looking at the ideas which otherwise would have gone away.

What about the Master Value Fund - a fairly off-beat portfolio with 78 stocks?
It’s a small mid-cap portfolio with some large caps for stability and an investment orientation which is growth at reasonable pricing rather than pure value kind of strategy.
We differentiate the mid-cap fund from this by the investment style - the mid-cap fund is more growth oriented and this fund is more growth at reasonable price oriented style. So, within the same industry, a company which is cheaper could go into the Master Value Fund, whereas the company that is slightly more expensive but is registering higher growth could settle in the mid-cap portfolio.
This fund has done well over the last three years and it also corresponds with the phase in the market where value stocks have outperformed growth oriented stocks as the market has decidedly moved towards the phase where companies that need to raise capital more often to fund growth are not looked upon favorably by investors. Whereas companies which have stable growth and are attractively priced have seen more inflows from investors. So, this fund is fairly well positioned in that phase of the market and it has scaled up nicely from around Rs 300 crore two years ago to around Rs 750 crore. But it’s a fund which is difficult to explain to distributors and investors in the sense that it is neither a pure mid-cap nor a pure large-cap fund and its investment style is based on value /growth at reasonable price.

Do you find any opportunistic or special situation in any of the sector or thematic funds which UTI AMC has?
These funds were launched in a different time period. Over the last three years, diversified funds have generated higher returns than very thematic or sector-specific funds as such. Even the investor and distributor preferences have moved away from such funds. They can be used for ideas which you otherwise might not put them in a diversified fund, but would find them worth one’s while to have in a sector or thematic fund. And they offer us an opportunity to engage more discerning investors who have a higher understanding or risk and who are willing to take higher risk for higher returns by focusing on few sectors rather than getting into general purpose funds.

RBI: Reserve Bank of India / FII: Foreign Institutional Investors / QE1-QE2: Quantitative Easing / PE: Price Earnings / SIP: Systematic Investment Plan / PSU: Public Sector Unit / NBFC: Non-Banking Financial Company