We earlier carried the views of Vetri Subramaniam, group president and head of equity at UTI AMC Ltd, on various sectors. You can read them here. Here he talks to Morningstar's Ravi Samalad specifically on the funds in the UTI stable.
You have completed 16 months at UTI Mutual Fund. What were the changes you brought about?
UTI has a long legacy of research and fund management. So it’s not like it has been a greenfield entity where one had to start from scratch.
However, there were few main changes.
In the investment process, there were certain factors which were emphasized but not articulated with a clear framework in terms of numbers. Now, we distinguish between companies based on what we believe are the two most important parameters – operating cash flow and return on capital. We now have a framework where companies are rated based on consistency of these parameters over previous years. Based on that, the analyst can focus on factors that might cause the metrics to change.
The second change I brought about was in fund management style and articulation of strategies for different funds. Due to legacy issues, UTI has a large number of funds. But the style difference in our equity funds was not stark. So I defined the uniqueness of each fund’s investment style and distinguished between each portfolio.
Finally, we aligned the benchmarks of each fund and matched the fund manager with the appropriate strategy. Most of these changes were done by June 2017.
Going ahead, the fund recategorization mandated by SEBI will now confine fund managers to a large extent.
There’s an inbuilt rigidity. The regulator has chosen to define market caps based on the number of companies. For instance, if five new companies come with IPOs having market cap of Rs 25,000 crore then automatically companies ranking 245 to 250 will get pushed down in the small-cap bucket.
Ideally, the approach which Morningstar adopts which is defining companies based on percentile of market cap is a better approach. That said, from an investors perspective it becomes easy for them to understand the rule which fund managers are following while picking stocks.
In UTI Long Term Equity Fund, which you took over in September 2017, the mid-cap exposure has been increasing. Can you explain your thought process in this turnaround?
When I got involved in the fund, UTI LTEF had 75-80% exposure to large caps. It was one of the few funds in tax-saving category which had a large cap focus. This put the fund at a disadvantage compared to peers who have 40-55% exposure to mid-caps. When we did a review, it made sense to adopt the same thought process as our peers because the money comes with a 3-year lock in. Our experience suggests that a lot of the money stays longer than three years. If investors have a longer-term horizon, it makes sense to have mid-cap exposure. Currently, the fund has 55% exposure to mid-caps.
What kind of companies do you bet on in the mid-cap space?
We buy companies which have a good historic track record but are currently experiencing a challenging business environment. We buy it in the hope that there will be reversion to the mean.
Whatever are our best active weight alpha positions in UTI Mid Cap Fund are reflected in LTEF as well. So there’s a high degree of complementarity in UTI Mid Cap and UTI LTEF.
UTI Opportunities was rechristened as UTI Value Opportunities. You took over this fund in February 2017. What has changed for the fund?
We repositioned the fund.
It was not distinct from some of our other equity funds. It had been run as a slightly aggressive fund with a large-cap orientation having a bottom-up approach which did not match with the positioning of the fund.
We repositioned it as a fund to say that top down, bottom up focus, sector allocation and market cap position of the fund will play a role in generating alpha but we will be guided by valuations. If valuations are attractive, we will be overweight in a sector or segment. For instance, the fund has been overweight in IT since May 2017.
Check our analysts' views on specific equity funds:
UTI Dividend Yield gets a sharper focus
Analyst note on UTI Dividend Yield
UTI Mastershare Unit
UTI Equity
UTI Value Opportunities
UTI Mid Cap
