Unit Trust of India is no longer the sleeping giant. This was revealed by UTI with its first ever disclosure of portfolio turnover. UTI is no longer a patient buy and hold investor, but at its aggressive best, actively churning the portfolios of their schemes just short of being a day trader.
Simply put, portfolio turnover is a measure of how actively a fund manager trades the portfolio of your fund. Expressed in percentage, the inverse of a fund's turnover ratio is the average holding period for a security in that fund. If a fund has a 20 per cent turnover ratio, it would suggest that - on average - the fund will hold a security for five years before selling it. A fund with a 200 per cent turnover ratio will change its full portfolio in six months or in other words, replace the entire holdings in its portfolio with new stocks in six months.
The turnover ratio is calculated by taking the annual purchases or sales (excluding cash) and dividing it by the average net assets of the fund. For instance, a fund has purchased stocks worth Rs 50 crore and sold Rs 100 crore during a given year. The turnover ratio is arrived at by dividing the lesser of the two (in this case, purchases) by the total average assets of the fund (say Rs 200 crore), which is 25 per cent. Interestingly, the turnover ratios of all the schemes of UTI are at very high levels. A high turnover ratio can have several factors driving it. First, the fund manager may be trying to cash in on the short-term opportunities thrown up by the volatility in the markets. Second, it could be due to the frequent inflows into and outflows from the fund. Yet another reason could be the portfolio restructuring, similar to the instances galore of funds exiting old economy stocks in favour of new economy stocks. An example of the case would be Grandmaster and Masterplus 1991. Their turnover ratios at the back of restructuring were 341.52% and 190.61%, implying that the funds turned around their portfolios once in three months and around six months, respectively.
The series of sector funds launched in June '99, have still higher turnover ratio. UTI Services Sector portfolio has been the most shaken portfolio with turnover of 1110.9%, implying that the fund's portfolio was turned around 11 times in a year. UTI Petro has a PTR of 841.53% followed by UTI Brand Value at 609.10% and UTI Pharma & Healthcare at 490.19%. UTI Software fund is relatively steady at a PTR of 451.25% implying a turning around of the portfolio over 4 times in a year. It would be interesting to compare the above figures with that of Kothari Pioneer AMC, which is diametrically opposite at far low levels. The turnover of KP Infotech stands at 25.04% and that of KP Pharma at 16.13%. Thus the two funds turnaround their portfolios roughly around once in 4 years and 6 years respectively.
While, all the above sector funds of UTI have had good amount of inflows over the past few months, the very high portfolio turnover of UTI Services Sector is attributed to an attempt to time the markets with an intention of having trading profits. However, it is dangerous to expose the portfolio to frequent changes. While, UTI Services Sector fund's strategy of being nimble-footed may have so far yielded it good results, wild shocks in the future should be no surprise.
Fund manager's hard work has yet to meaningfully translate into performance as UTI funds barring few still settle down the performance charts. This clearly shows that hard work does not necessarily mean investors money working as hard. Perhaps it could mean higher transaction costs - brokerage and custodian fee. And no way can we decode the real cost of such high turnover, as investment is valued at cost plus brokerage.