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With the stock market declining 20 per cent in a year and valuations correcting significantly from their highs, this appears to be a good time to make lump sum investments in equity funds.
The UTI Master Value Fund appears to be a good choice. The fund's 20 per cent compounded annual return since launch (June 1998), its bias towards mid- and small-cap stocks and its value focus may all work to its advantage in a market rebound. Though this is a good time to make lump sum investments, it may be advisable to divide your surpluses into two-three instalments and pick up equity exposures if markets fall over the next few weeks.
Aggressive stock choices
Despite the ‘value' tag, UTI Master Value is not a low risk fund. For one, the fund invests a substantial portion of its portfolio in mid- and small-cap stocks.
The November 2011 portfolio, for instance, featured a 61 per cent exposure to stocks with a market cap of less than Rs 10,000 crore. Given the wide gap between the valuations of large-cap and the mid- and small-cap pack, such a focus is justifiable. However, the fund's high Beta (the propensity to move with the Sensex) and its past performance suggest that the fund is quite susceptible to downside.
Two, the fund has made aggressive stock choices, in its hunt for value. The bank PSU stocks that liberally dot the portfolio and stocks such as Shree Renuka Sugars, Polyplex Corporation and Zuari Industries that feature in it, no doubt, are available at low valuations, but do carry business risks in terms of cyclicality or high debt. The fund tries to mitigate these risks by holding a fairly large number of stocks in its portfolio, over 80 at last count.
The fund's preference for low PE stocks is evident from the fact that nearly 40 per cent of its holdings boasted a single-digit PE multiple as of December 2011. The confidence-inspiring aspect of the fund, however, is its impressive track record in navigating the past three market cycles. The fund has delivered compounded annual returns of 20 per cent over a 13-year time frame. The five-year returns at about 8 per cent may appear lacklustre but compare quite well with the market as well as the diversified category.
In addition, the fund has stayed comfortably ahead of the category average and the Sensex over five-, three- and one-year time frames. Though the fund lost much more value than the Sensex in the market crash of 2008, it has more than made up for this by participating enthusiastically in every market rally over the past five years.
Over the past year, the fund has also been successful in containing the declines in its NAV to a level less than the broader market.
The top sector exposures in the fund in November 2011 were to PSU banks, private banks, fertilisers, refineries and chemicals. While the valuations of some of the stocks in these sectors may seem low, they are vulnerable to a weak rupee.
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