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Unhealthy diversification for UTI's Equity funds

Call it the other extreme! While most mutual funds have lost heavily in the meltdown due to concentrated portfolios, UTI's equity funds are a picture of stark contrast with unhealthy diversification. Some of the shares are even dead wood.

Call it the other extreme! While most mutual funds have lost heavily in the meltdown due to concentrated portfolios, UTI's equity funds are a picture of stark contrast with rampant and unhealthy diversification. An overwhelming number of UTI funds are overloaded with minuscule investments in a wide array of stocks. Some of the shares are even dead wood, since either the companies have folded operations or stocks are not traded on the bourses. The unrelated diversification stands out in old generation funds, which were launched, in early 1990s. Most of these funds had garnered assets in excess of Rs 500 crore in their IPOs.

The large number of marginal holdings, with a typical size of Rs 2-3 crore, eventually translates into a reasonable component of the corpus and thus, is a drag on the net asset value. The impact is especially visible during a surging market, when a part of the portfolio (especially illiquid stocks) cannot contribute to the rising NAV. On the other hand, illiquid holdings can put an open-end fund in jeopardy in the event of a sizeable redemption. Further, even if these stocks are occasionally traded, liquidity immediately dries up when the market is in bear grip.

Consider UTI's Masterplus, which was launched in 1991. The Rs 692 crore open-end equity fund has 117 stocks. However, just 39 holdings, with individual weight in excess of 0.50%, make up for 93% of the portfolio. On the other hand, there are as many as 78 stocks, which account for 7% or a reasonable total investment of Rs 44 crore! Further, there are 62 stocks with an individual exposure of less than Rs one crore. During its 10-year history, a number of stocks, including some of the 1994 IPO picks, have gone bust. While these investments cannot be recovered and hence should be written off, Masterplus fund managers must sell off the other marginal yet liquid investments like ICICI, IPCL and Hero Honda to consolidate the portfolio.

Or, consider the case of UTI's largest open-end equity fund, Matergain '92. The Rs 1138 crore fund has a bulging portfolio with as many as 183 stocks. However, a mere 30 stocks form 86% of the holdings while a staggering 153 scrips make up for the rest! It is no different with UTI's closed-end schemes like Mastershare. With a size of Rs 1482 crore, the fund owns 196 stocks. While 44 stocks, with an individual investment of over Rs 5 crore, constitute 87% of the cumulative investment, the rest is represented by 152 stocks. In other words, Mastershare has magnanimously spread over Rs 190 crore, which results in sparse investments and adds a trifle to the NAV.

However, the new generation funds of UTI are lot more compact with focussed investments. This is attributed to their small asset base of under Rs 100 crore and since most of them are sectoral funds, they have dedicated investments in a select basket of stocks. For instance, the Rs 256-crore software fund owns only 33 scrips with 99% of the portfolio concentrated in 26 stocks.

The unproductive diversification has partly contributed to the poor performance of the old generation funds. For instance, Mastergain '92 has given a negative return of 2.54% in the last five years and has underperformed the indices. Its return since launch is only 2.31%. For closed-end Mastershare, the five-year return is a paltry 0.57%. The funds can surely be re-structured, if one considers the case of Morgan Stanley Growth Fund. The fund had also mobilised whopping Rs 924 crore in 1994 and had as many as 274 stocks in 1996. However, the same was down to 114 stocks in September 2000 with an asset-base of Rs 857 croe. The five-year return of the fund is also better at 13%.