Morningstar Opinion
UTI Dividend Yield falls into the Morningstar India large cap equity category. Anoop Bhaskar heads the equity investment team and has sound fund management experience. Though his experience is relatively lower at UTI, he had successfully run funds in his previous assignment in Sundaram Mutual. He is supported by three portfolio managers (PMs) and seven member analyst team. The PMs have been in the investment management function for around 15 years each. Swati Kulkarni is directly responsible for management of this fund. Kulkarni possesses sound understanding of economic research and has been managing funds for the past 11 years.
The team’s process has helped the fund to post a stellar performance. The investment strategy is originally developed by the firm’s investment management team. The fund seeks to invest in stocks with dividend yields higher than that of S&P Nifty Index. In addition to dividend yields, the team also looks for companies with higher cash flows, past earnings and management track record while selecting stocks. The investment mandate permits 35% of the fund’s corpus to be invested in lower dividend yields/growth stocks. The fund’s strategy is in line with growth at reasonable price (GARP) and not necessarily value investment approach. The investment strategy is consistent and is easily repeatable.
The fund’s portfolio is a blend of large cap growth and value stocks. Given its investment strategy, banking, oil & gas and power sectors accounted higher chunk of the fund’s portfolio. Software stocks like Infosys Technologies and Tata Consultancy Services are included owing to their higher cash flows.
The fund’s four and half years track record has been quite outstanding. Over shorter time periods, the fund’s performance has been satisfactory as well.
The fund boasts of a sound investment strategy backed by a highly experienced team which certainly holds good for the fund. These factors have been able to help the fund in delivering consistent performance. The fund is a suitable option for conservative investors who wish to invest in equities.
Management
The fund was launched in April 2005 and benefits from a well experienced investment management team. Swati Kulkarni has managed the fund’s assets since December 2005. It is a team approach for investment management. Bhaskar, joined UTI in mid 2007 and earlier worked with Sundaram BNP Asset Management as head of equity where he successfully managed its equity funds. He also had stint with Templeton Asset Management as Senior Research Analyst. Harsha Upadhyay and Sanjay Dongre are other two PMs that support Bhaskar. Upadhyay has spent 14 years in fund management and equity research and has been associated with fund house since 1996. Sanjay Dongre, senior fund manager is responsible for equity research, dealing and investment management functions and has been with the firm since 1994.The team of seven analysts with average 4-5 years of experience supports the fund management team.
Strategy
The manager seeks to buy stocks with dividend yields higher than the yield on S&P CNX Nifty index. The primary objective of the fund is to seek capital appreciation, not necessarily dividends and therefore, the fund manager also invests 35% of the fund’s corpus in low dividend yield stocks for example Infosys Technologies and Sesa Goa. In addition to dividend yield, the company’s cash flows, earnings track record, management and valuations are looked into prior to short listing stocks for investments. Cash flows are scrutinized to determine company’s ability to continue paying higher dividends. The investment management team screens approximately 300-350 stocks with active coverage list of 150 stocks. Each analyst covers around 20-25 stocks which is a manageable coverage list. The team believes in meeting company management prior to buying stocks. Conference call with company management is a prerequisite prior to investing in a stock. The investment team does not believe in investing in more than 2-3% of fund’s corpus in a single stock. The risk is controlled from position sizes, valuation discipline and also through the use of cash. The manager depicts conviction in its strategy which has paid off well.
Portfolio positioning
The fund’s portfolio is primarily driven by bottom-up stock selection process and is primarily large-cap dominated, amounting to 73% of the fund’s assets. Given the investment mandate, the portfolio hovers between large growth and value investment styles. The fund also has investments in mid and small-cap stocks which comprises 26% of its assets. During the three-year period through December 2009, the financials, materials and energy sectors on an average accounted for highest holdings in the fund’s portfolio. The fund manager preferred banking shares owing to expectations of long-term economic growth and increased growth for banking companies. In banking, ICICI Bank (6.2%) and State Bank of India (4%) featured in top-10 holdings while the housing loan provider, HDFC accounted for 4.4% of the fund’s corpus.
Within the materials sector, the fund had higher allocation to steel stocks prior to 2008. Global economic meltdown in 2008 led to decrease in steel holdings and the manager prefers them now more from an opportunity point of view. Within energy sector, the manager favoured public sector companies like Oil and Natural Gas Corp (ONGC) and Gas Authority of India Ltd (GAIL) owing to higher dividend yields and attractive valuations. The expansion in gas pipeline and growth in earnings also led to an increase in allocation to GAIL. The utilities sector accounted for 12% of the fund’s corpus. Here, National Thermal Power Corp accounted for 4.5% of the fund’s corpus mainly from a defensive point of view. The manager liked Tata Power given its coal linkages and its Mundra project benefitting under the government proposed ultra mega power projects.
During the sharp equity selloff in 2008, the manager used cash to protect the fund’s downside and had cash allocation as high as 32%. This was reduced gradually in second half of 2009, but dragged down the fund’s performance during the first half of 2009 when stocks rallied.
Performance
Relative to its large cap equity category, the fund delivered superior risk-adjusted return. During the three-year period through December 2009, the fund registered the best risk-adjusted return and was ranked at first position with five stars rating from Morningstar. In terms of trailing return, the fund returned 20.75%, significant outperformance of 11 percentage points over its benchmark- BSE 100 index and 12.5 percentage points over its large-cap peers. The fund’s performance over shorter time periods has been quite noteworthy too. Except the sharp underperformance in 2006, its performance has been quite consistent across last three calendar years starting with 2007. In 2006, the fund lagged its peers owing to the rally in construction and capital goods stocks which the manager avoided owing to their lower dividend yields.
Risk
The fund depicts lower volatility, as compared to its peers, owing to its relative value bias. The fund featured in “Below Average” risk rating for three-year period through December 2009.
Costs
The fund’s expense ratio of 2.09% is lower than its category average of 2.15% which works in fund’s favour.
