Launched in 1986, UTI Mastershare Unit is the oldest actively managed Large Cap Fund. It has won the Morningstar category award for Large Cap in 2022. We caught up with Swati Kulkarni, Executive Vice President & Fund Manager - Equity, UTI AMC, who has been managing this fund since November 2006, about what has helped the fund generate consistent alpha in the Large Cap space.
UTI Mastershare has outperformed the category and index in 2020 and 2021. What worked in your favour?
In 2020, our overweight position in Infosys, Jubilant Foodworks, Divi’s Laboratories, Balkrishna Industries, Tata Steel, and Indian Energy Exchange and underweight position in IndusInd Bank and ITC helped us generate alpha which was partly offset by our underweight position in Reliance Industries, Vedanta, HCL Technologies and Wipro.
In 2021, in addition to the 2020 outperforming stocks, our exposure to SKF, Tech Mahindra, Aditya Birla Fashion & Retail, Metropolis Healthcare and Tata Motors worked well as these stocks outperformed, partly offset by underperformed stocks like Dr. Reddy’s Laboratories, Sanofi, Eicher Motors where we were overweight.
How do you plan to sustain the performance of the fund?
Sticking to our investment style of Growth at a Reasonable Price (GARP) with focus on selecting companies having strong competitive franchise should help us in the sustenance of long-term performance. Eliminating value destructors is as important as investing in value creators and our investment process is geared towards identifying the same.
You have been managing UTI Mastershare Unit since 2006. Has it become more challenging to outperform the benchmark and peers now as compared to earlier and how are you tackling this challenge?
In recent times, most of the actively managed funds have faced challenges to beat the benchmarks across the market capitalization, especially when there have been a scenario of few stocks driving the benchmark. Rather than chasing certain stocks having strong momentum (which may not fit into our investment thought process) focusing on opportunities where market may be less optimistic about recovery or growth runway often helps in generating Alpha (outperformance). For example, Information Technology (IT) sector in 2017 or private sector banks in 2018. It may be noted that the performance comparison of the funds are now made against the Total Return Index (TRI) vs Price Return Index (PRI) earlier. Comparing performance of direct plans over TRI will reflect higher alpha over regular plans due to lower expense ratio in direct plans.
The fund had a higher weightage to cyclical (52%) and technology (15%) as of January 2021. Do you believe technology will continue to outperform the broader market in 2022?
We do not estimate further rerating of the technology sector, however, the earnings growth visibility in the sector is relatively better. During pandemic, past hesitancy on part of the clients of IT services companies for data migration to the cloud ended in a bid to stay competitive leading to large deal wins and deal pipeline thus improving revenue growth visibility for at least 3-4 years. The sector with strong cash flow generation and return on capital employed (RoCE) is likely to outperform in the near-term. We will be watchful of margin delivery though.
What helped the fund witness a comparatively lower maximum drawdown in CY 2021 and 2020?
During the challenging phase of the pandemic, we observed companies having competitive advantages gaining market share. A diversified portfolio without high sector concentration also helped. The emphasis on having more than 90% of the portfolio in companies that have generated positive operating cash flow consistently and about 60% allocation to high Return on Capital Employed (RoCE) companies meant that the portfolio consisted of companies with strong financials and low leverage. Our overweight position in IT, Pharma, Telecom, and Consumer discretionary helped despite some offset from Oil & Gas, Automobile sectors.
Any reason why you have no exposure to the real estate sector? Some experts seem to be bullish on the sector…
Residential real estate has long-term potential although new home building activity tends to be more cyclical. We have preferred to own indirect plays on total residential real estate with opportunities coming out of replacement/renovation/financing etc. These also have consistent cash flow generation and healthy return ratios.
In which pockets have you found opportunities in the recent market fall?
We are positive on Banking & Financial Services and Automobiles which have corrected sharply.
Do you foresee more investors moving to passive strategies in the Large Cap space going ahead?
Passive strategies have the advantage of low cost and efficient tracking of the underlying Index. Innovative passive products are also being launched e.g. UTI MF launched UTI Nifty 200 Momentum 30 Index Fund and UTI S&P BSE Low Volatility Index Fund. Certainly, the passive strategies will compete for allocations from investors. The large institutional investors managing provident funds and pension funds appear to have preferred passive investing for lower expense ratio, and without fund manager bias, although they also invest in actively managed funds. The track record of the actively managed funds of outperformance over index over a long period of time with lower volatility reinforces their importance in one’s equity allocation. In India, mutual fund penetration is still low and we see opportunities for growth in both active and passive strategies.
Is it advisable to have a mix of active and passive funds in the large-cap space too?
Opportunities of alpha creation will be there for active fund managers for e.g., mispricing opportunities out of extreme optimism/pessimism in the marketplace, opportunities outside index, newly listed securities, ability to act on changing competitive landscape and investment rationale, etc. Therefore, it would be advisable to have long-term equity allocation to actively managed Large Cap funds.
Winners of Morningstar Fund Awards 2022
