UTI Value fund Fund-Regular Plan Growth INF789F01AG5

The following text is from Feb. 20, 2023.

UTI Value Opportunities’ investment process follows a blended strategy with a value tilt. The valuation-conscious approach seeks to invest in companies across the market cap spectrum. The strategy aims to invest primarily in companies with a long growth runway and are run by competent management. In addition, a sizable portion of the portfolio is also dedicated to companies that are currently grappling with transitional issues attributed to their respective sectoral macrocycles. In both cases, valuation considerations (relative, intrinsic, and historical) are central to the eventual investment decisions.

The strategy defines an investible company as one with a successful business model, is run by competent management (having a history of skillful capital deployment), and, more importantly, has a track record of generating a high return on investment. To select companies for inclusion in the portfolio from the existing universe, the initial quantitative screening process is by determining companies that have generated higher operating profits and long-term returns on equity. The approach emphasizes on the trends and patterns discerned from historical performance than from the forecasts. Based on these two factors, the companies are divided into three tiers each (C1, C2, C3, and R1, R2, R3). Cash flow tiers are based on the number of years in which companies have generated positive operating cash flows in preceding five years, while ROCE/ROE tiers are based on the previous 5-year average return on capital and consistency in the implied ROE for financials over five years. Based on the views generated during the investment selection processes, the fund manager then tailors a diversified portfolio to meet the risk and return objectives of the strategy and seeks to hold it across multiple economic scenarios. Risk management considerations are inherent in the process. Exposure limits are clearly defined. While constructing the portfolio, exposure to individual stocks is capped at 6% of assets and the individual sector at 35% of the net assets. Further, exposure to top 10 stocks is limited to 35% of the assets (versus 44% as of January 2023), while cash allocation is maxed at 10%. The five member risk management team ensures that the manager adheres to the defined risk limits.

UTI Value Opportunities Fund has a diversified portfolio of stocks from across the full market cap spectrum. The manager adopts a bottom-up approach while investing. As suitable ideas are identified, he builds the portfolio through multiple stocks that will work in the long run. Hence, the liquidity and price risks are managed with a high degree of diversification. The change in the portfolio manager hasn’t resulted in much discernible change in the portfolio composition. However, there was a mild uptick in the portfolio turnover due to adjustments made in sync with cyclical changes in the broader economy. The portfolio was historically positioned as a dedicated large-cap fund, but with its revamping under erstwhile manager, Vetri Subramaniam, in 2017, the fund can now vary its mid- and small-cap, or SMID, exposure more widely based on valuation differentials. The combined exposure of the SMID cap can potentially go up to 35% of its net assets. As of January 2023, the SMID cap allocation of the fund is 31.0%. In sector allocation terms, as of January 2023, the strategy is marginally overweight to financial services, while the most recent incremental buying in selective names led to the pronounced overweight exposure to auto-ancillary and healthcare sectors. Financial exposure is a max bag of banks, nonbanking financial services firms, and insurance companies. Within banks, private names are preferred over public sector banks. Exposure to the IT sector has been mildly trimmed amid the headwinds in the sector, with a spike in interest rates across the globe. As of January 2023, the fund is notably overweight in consumer discretionary and real estate while underweight in energy companies relative to the Morningstar category benchmark, S&P BSE 500 Index, and its average category peer. The top 10 holdings represent approximately 44.3% of the net assets as of January 2023. Approximately 63% of the portfolio is exposed to cyclical sectors, implying the high correlation of the strategy’s performance to domestic economic activities.