Search the Internet          Tips  Sites: Finance, Investment

UTI equity funds over-diversified

Aabhas Pandya

Call it the other extreme! While most mutual funds have lost heavily in the meltdown due to concentrated portfolios, Unit Trust of India'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 deadwood, 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 5 billion in their initial public offerings.

The large number of marginal holdings, with a typical size of Rs 20-30 million, 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 6.92 billion open-end equity fund has 117 stocks. However, just 39 holdings, with individual weight in excess of 0.50 per cent, make up for 93 per cent of the portfolio. On the other hand, there are as many as 78 stocks, which account for 7 per cent or a reasonable total investment of Rs 440 million! Further, there are 62 stocks with an individual exposure of less than Rs 10 million. 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 could 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 11.38 billion fund has a bulging portfolio with as many as 183 stocks. However, a mere 30 stocks form 86 per cent 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 14.82 billion, the fund owns 196 stocks. While 44 stocks, with an individual investment of over Rs 50 million, constitute 87 per cent of the cumulative investment, the rest is represented by 152 stocks. In other words, Mastershare has magnanimously spread over Rs 1.90 billion, which results in sparse investments and adds a trifle to the NAV.

However, the new generation funds of UTI are a lot more compact with focused investments. This is attributed to their small asset base of under Rs 1 billion and since most of them are sectoral funds, they have dedicated investments in a select basket of stocks. For instance, the Rs 2.56-billion software fund owns only 33 scrips with 99 per cent 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 per cent in the last five years and has underperformed the indices. Its return since launch is only 2.31 per cent. For close-end Mastershare, the five-year return is a paltry 0.57 per cent. The funds can surely be restructured, if one considers the case of Morgan Stanley Growth Fund. The fund had also mobilised whopping Rs 9.24 billion 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 8.57 billion. The five-year return of the fund is also better at 13 per cent.

Fund	Stocks Held	Size
		(Rs Cr)
Mastershare	196	1482
Masterplus '91	117	692
UGS 5000	58	256
Mastergain '92	183	1138
MEP '93	88	229

Source: Value Research

Money

Fund news

Tell us what you think of this report