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UTI Opportunities Fund has an impressive 3 yr and 5 yr performance track record relative to market and category averages, but a somewhat disappointing 6 mth and 1 yrperformance record. In this article, Anoop takes us through the fund strategy, the reasons that have helped him deliver a superior long term performance as well as a detailed review of what contributed to the near term underperformance. He also takes us through how he is positioning the fund going forward, and what are some of the strategy changes that he has adopted, at the margin, to ensure that the fund continues delivering long term outperformance.
Fund strategy
The fund aims to deliver alpha through an opportunistic, top-down driven sector selection strategy. In a market which is increasingly influenced by FII flows - which tend to be more top down than bottom up oriented, a top-down sector selection strategy is increasingly relevant in Indian markets. Unlike some other "Opportunities" funds that employ an across-market cap strategy, this fund focusses largely on the large cap universe. We further define "opportunities" as situations arising out of sectoral favourability rather than opportunities arising out of capitalization rerating.
Performance analysis
Drivers of long term outperformance (3 yr& 5 yr) :
The long term performance track record (3 yr and 5 yr numbers) are well ahead of market benchmarks and category averages, which demonstrate the long term wealth creation record of this fund. The fund has maintained a defensive posture since December 2010, which can be seen from the fact that the fund's beta has been around 0.6 since then. This has helped significantly reduce volatility in the fund's performance and helped deliver better than market performance, in a market that has been characterised over the last 3 years by high volatility and frequent sell-offs in some high beta stocks.
Reasons behind muted near term performance ( 6mths and 1 yr) :
Essentially, the fund's performance has been trailing its peer only in the last quarter, which has impacted the short term and the one year performance figures of the fund. Hence on should not confuse the one year performance metric as an indicator of the year long performance of the fund. The reasons that can be attributed to the blip in the performance are as follows :
Sector allocations:
· The overweight position to the Cement and Cement Products sector has had a negative attribution to the overall fund performance over the last two months. The sector has been an underperformer in the last quarter of the calendar year primarily because of pricing pressures arising due to demand constraints.
· Financial Services: The sector primarily witnessed movement in the mid cap banking sector stocks and PSU Banking stocks. The fund orientation/bias towards large caps coupled with the strategy to avoid government companies contributed to the negative attribution to the performance through this sector.
· Oil & Gas: A similar trend was witnessed in the sector where government announcements and the euphoria over the "visible" pragmatism of the government led to a run up in the PSU run stocks in this sector. The portfolio's lack of exposure to PSU Oil & Gas stocks had a negative contribution again to the performance.
· Consumer Goods: The portfolio continues to have a significant exposure to this sector and the underperformance of the sector led by the large cap constituents again worked against the portfolio strategy in the short term.
Portfolio strategy going forward
Sectoral & Market Cap Allocation
· The portfolio would continue its current strategy of active sector selection with a top down bias.
· The one change that would and is being witnessed in to increase exposure to quality midcaps in the sectors to bring up the allocation to ~15% of the portfolio. Recent changes have been MRF Ltd. in the automobile sector and Shree Cements Ltd. in the cement sector.
· We would continue our significant exposure to the Financial Services where the portfolio has increased its exposure to Axis Bank Ltd. and would continue to avoid PSU Bank stocks, except SBI Bank (we believe that PSU Banks are closer to their peak valuation at 1/1.05x Price to Book as compared to their current valuations at 0.90/0.95x Price to Book. We believe there is a higher probability of the private sector banks undergoing re-rating due to significant spread in the current valuations as compared to their respective peaks).
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