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Unit Trust of India: Working harder

N R Priya

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 is at its aggressive best, actively churning the portfolios of 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 500 million and sold Rs 1 billion 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 2 billion), 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 per cent and 190.61 per cent, 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 1999, have still higher turnover ratio. UTI Services Sector portfolio has been the most shaken portfolio with turnover of 1110.9 per cent, implying that the fund's portfolio was turned around 11 times in a year. UTI Petro has a turnover of 841.53 per cent followed by UTI Brand Value at 609.10 per cent and UTI Pharma & Healthcare at 490.19 per cent.

UTI Software Fund is relatively steady at a turnover of 451.25 per cent implying a turning around of the portfolio over four times 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 per cent and that of KP Pharma at 16.13 per cent. Thus the two funds turn around their portfolios roughly around once in four years and six years respectively.

While, all the above sector funds of UTI have had a 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 a 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 cost - brokerage and custodian fee. And there is no way once can decode the real cost of such high turnover, as investment is valued at cost plus brokerage.

Dancing Elephant

Fund	Turnover Ratio (%)
UTI Services Sector	1110.90
UTI Petro	841.53
UTI Brand Value	609.10
UTI Pharma & Healthcare	490.19
UTI Software	451.25
UGS 10000	426.79
Grandmaster	341.52
UTI EquityTax Saving Plan 2000	323.14
UTI Primary Equity	252.41
Master Index	219.79
Master Plus '91	190.61
Nifty Index Fund	166.39
Index Select Equity	152.90
Mastergain '92	119.09
Master Growth	98.40

The Kothari Pioneer Funds

Fund	Turnover Ratio (%)
KP Prima	61.41
KP Prima Plus	39.68
KP Bluechip	37.90
KP Taxshield	35.26
KP Infotech	25.04
KP Internet Opportunities Fund	19.35
KP FMCG	17.90
KP Pharma	16.13

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