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A Contrarian Choice?

The challenge it faces is not that of portfolio management but taking a call on the political sentiments of the country, which have always been averse to fuel price hike

With five-year trailing returns of 40.66 per cent as on October 18, 2005, UTI Petro has rewarded its investors well. The fund has hit a rough patch in recent times, as the politics surrounding the oil prices hike hit the oil sector hard.

Being an oil sector fund, it was easily able to avoid the stock market crash of 2000, which was led by the tech stocks. However, the first quarter of 2000 still stands out in the performance history of the fund, when it gained 14.44 per cent, while the BSE Oil & Gas index had lost massive 25 per cent. Investing more than half of the assets in a single stock is never recommendable, but this is exactly what saved the fund from disaster. During March 2000, the fund had 60 per cent of its portfolio in Reliance Industries, while it steered clear of the oil PSUs which were falling like a pack of cards during this time. The fund did well to build positions in the oil PSUs in subsequent months when they had already hit their rock bottom levels. Because of that, it was able to make the most out of the subsequent rally in these stocks.

Given that it is a sectoral fund, UTI Petro holds reasonable number of stocks in its portfolio (18-19 stocks since the start of 2004). However, the fund has a tendency to get concentrated in its top holdings. As per September 2005 portfolio, the top three holdings controlled almost 40 per cent of the assets. Many of the stocks have been in the portfolio since long, with oil giants like HPCL, Indian Oil, ONGC and Reliance Industries being at the core of the portfolio. But of late, an increased exposure to Hindustan Oil Exploration has proved quite rewarding. The fund entered the stock in January 2004, and increased its exposure in the subsequent months. Since then, the stock has witnessed tremendous appreciation. The biggest concern while investing in oil sector is that the fortunes of oil stocks depend heavily upon the movement of crude oil prices. But on the brighter side, the fundamental attributes of the oil giants have never been in doubt. Added to that, the major companies in the sector have a consistent track record of distributing good dividends year after year.

Oil sector is out of favour at the moment, and many equity funds have exited from the leading oil stocks. The sector is suffering primarily because of a tremendous appreciation in the crude oil prices, coupled with the Indian government's reluctance to hike the domestic oil prices, thus hurting the margins of the refining companies. However, with the announcement of a hike in the domestic fuel prices recently, we may witness a revival in the fortunes of oil stocks on the bourses.

But to keep that momentum going, the government will have to keep pace in hiking domestic prices with the expected sustained rise in the crude oil prices going ahead. If that does not happen, then the fate of oil sector on the stock exchange will keep fluctuating like a pendulum. But then, that is the charm of this sector and the fund- it may emerge as an excellent contrarian bet.

All things considered, investing in UTI Petro from this point on amounts to taking a courageous call on how the political interaction between the pragmatists and the leftists will play out.