Fund Focus: UTI Mastershare

31 years dividend record will be maintained irrespective of market phase

Swati Kulkarni, VP & Fund Manager, UTI MF

6th October 2017

UTI Mastershare has built up a loyal investor base on the back of an enviable 31 year uninterrupted dividend track record. Swati says the endeavour will be to maintain this track record going forward irrespective of market phase. The fund is seeing some performance headwinds in CY2017, but Swati remains confident that her GARP strategy will pay off as expected earnings growth in her portfolio stocks starts to materialize.

What do percentiles and their colours signify?

Fund performance is typically measured against benchmark (alpha) and against competition. Performance versus competition is measured through percentile scores - ie, what percentage of funds in the same category did this fund beat in the particular period?

If a fund's rank in a year was 6/25 it means that it stood 6th among a total of 25 funds in that category, in that period. This means 5 funds did better than this fund. In percentile terms, it stood at the 80th percentile - which means 20% of funds did better than this fund, in that particular period. If, in the next year, its rank was 11/26, it means 10 other funds out of a universe of 26 did better than this fund - or 38% of funds did better than this one. Its percentile score is therefore 62% - which signifies it beat 62% of competition.

Most fund managers aim to be in the top quartile (75 percentile or higher) while second quartile is also an acceptable outcome (beating 50 to 75% of competition). What is generally not acceptable is to be in the 3rd or 4th quartiles (beating less than 50% of competition). Accordingly, we have given colour codes aligned with how fund houses see their own percentile scores. Green colour signifies top quartile (percentile score of 75 and above), yellow or amber signifies second quartile (percentile scores of 50 to 74) and red signifies 3rd and 4th quartile performance. A simple visual inspection of colour codes can thus give you an idea of how often this fund has been in the top half of the table and how often it slips to the bottom half. A great fund performance is one which has only greens and yellows and no reds - admittedly a tall ask!

WF: CY2017 is turning out to be a challenging year in terms of fund performance for Mastershare. What were some of the calls that have dragged performance down and what steps are you taking to get the fund back into its positive alpha track record?

Swati: In line with UTI Mastershare's investment strategy that follows a Growth at Reasonable Price principle for stock selection, it had an underweight position in a private corporate bank, housing finance company and private consumer finance NBFC, because these were quoting at high valuation compared to the underlying expected growth. These stocks outperformed during the last one year. While our underweight position in the largest PSU bank worked well, the overweight position in another PSU bank where there was a management change did not work. These two factors offset the positive contribution generated by our overweight position on outperforming private sector retail banks and NBFC. Our overweight on Industrial Manufacturing, Automobile, and underweight on Consumer, Telecom worked well but underweight on Metals and overweight on IT have not worked well. Also, the Fund had an average cash position of 3% which contributed negatively.

During the last 18 months, stocks that have shown earnings growth have got rerated handsomely and they now trade at much higher valuation than their historic levels. We believe that by sticking to its investment principle of "GARP", the fund will benefit from the valuation support as the expected earnings growth starts to materialise.

WF: The fund has a sizeable exposure to IT - a sector that many feel is facing multiple headwinds. Is your bet in the IT space a contra call?

Swati: The Fund has an overweight position of 1.5% on the sector compared to the BM weight of 9.6%. We believe that the headwinds related to near term revenue growth and costs are getting priced in. The valuations as well as the earnings expectations have come down and the companies in the sector are quoting at a discount to the broader market. IT spends are oriented towards digitisation as more and more clients roll out their digital initiatives to stay competitive. Indian IT companies are investing in developing/ acquiring skills to garner this growing opportunity. Hence, we are positive on future revenue growth in the sector which the market seems to be pessimistic on. Besides, the financial strength reflected in strong free cash flow generation, high dividend yield and return on capital employed may limit the absolute downside.

WF: What is your view on the Oil & Gas sector - where you have a sizeable exposure in the fund?

Swati: We have an underweight position on the sector as a whole due to an underweight position in the petrochemicals and upstream companies. Overall exposure to the sector is 10% largely coming from Gas and downstream companies, compared to the sector weight of 13% in the benchmark.

Our overall positive stance on the Gas transmission and distribution companies is based on the expectation of benign Gas pricesin the near future. Also gas is better alternative fuel from the environmental perspective. This should help in increasing demand for Gas resulting in higher volume growth for the companies in Gas T & D. We are overweight on OMC on expectation of consumption growth in petrol and diesel, stable marketing margins and reasonable valuation.

WF: Market valuations are now clearly in overvalued zone relative to current earnings. What is your view on near term earnings recovery - which has proved elusive for a couple of years now?

Swati: At the aggregate market level the earnings growth has got adversely affected during the last 2-3 years due to certain sectors, even though certain stocks continued to report earnings growth. For e.g. in FY '15, FY '16 it was the global cyclical sectors which did poorly as their margins shrank with falling prices, thereafter in FY'16 and FY '17 it was the corporate banks which reported meagre profits(loss in few cases) due to heavy NPA provisioning. This led to downward revision in Earnings growth expectations in last few years and resulted into higher valuation of market as 'E'(Earnings) the denominator in 'P/E'(valuation) remained muted.

While at the instance of RBI and Government, banks have been recognising the asset quality issues and the balance sheet repair process has started with a few companies raising equity capital, there still a long way before we can expect a full-fledged recovery. Private capex pick up can be expected later when capacity utilisation levels reach closer to 85%-90%. So the near term recovery is expected to be in select pockets driven by operating leverage benefits, restocking post GST roll out, pick up in agrarian economy andGovernment spending on roads and railways.

WF: What is your 12-18 month call on markets from here on and what do you see as the key drivers?

Swati: We expect markets to remain range bound in short term. The key driver has to be earnings growth which we expect in select pockets.

WF: Which sectors/themes do you see leading the market from here?

Swati: The sectors like consumer discretionary, retail banks are expected to continue reporting steady growth, but the real question could be which sector or theme will lead the returns. In that context you need to be cognizant of the valuation vs the expected growth. Therefore, leaders from here will be lot more stock specific than sector specific.

WF: What are plans on dividend distribution this year? Can your investors continue to expect the unbroken record of dividends to continue?

Swati: It will be our endeavour to keep up the dividend track record that the fund has created over the last 31 yearperiod irrespective of the market phase.

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