High diversification mitigates risk

UTI Master Value Fund is an equity fund and had average assets under management of Rs 564.44 crore in August 2010. The fund was rated Credit Rating Information Services of India (Crisil) Mutual Fund Rank 1, under the small & midcap categories, for the last three quarters up to June 2010. The fund also features in the top 10 percentile of the Consistent Crisil Mutual Fund Ranking for June 2010.

Performance
The fund, managed by Anoop Bhaskar, has steadily improved performance in the last three years. A month-on-month comparison of its performance vis-à-vis the benchmark index reveals outperformance close to 60 per cent of the times. An improvement in performance saw the fund moving to the top 10 percentile of Crisil’s Mutual Fund Rankings. The ability of the fund to capitalise on the recent rally in the equity markets is evident from its net asset value (NAV) growth, which has beaten the Bombay Stock Exchange (BSE) 200 by a wide margin.

In the last 12 months, the fund’s NAV has risen 54 per cent, compared with the benchmark index’s 22 per cent growth. During the period, the peer set of small and midcap equity funds rose 43 per cent.

The high returns can be attributed to the fund manager’s ability to identify undervalued stocks, especially during the bear phase. High allocation to small and midcap stocks during the period made a significant contribution.

Also, over a longer period, the fund has posted above average returns, with its NAV appreciating more than 14 times since inception. An investment of Rs 1,000 in the fund would have grown to Rs 14,233 as against Rs 7,964 for an investment in the BSE 200 index.

On a risk-adjusted basis, the performance of the fund is better than both its peers and the benchmark index. Over a three-year period, the fund has a Sharpe Ratio (return per unit of risk) of 1.01 vis-à-vis the ratios of 0.59 for its peers and 0.22 for BSE 200.

Portfolio diversification
The fund’s portfolio is diversified with high exposure to small and midcap stocks. Exposure to stocks from the S&P CNX Nifty has never exceeded 22 per cent in the last three years. During the period, the average exposure to stocks from BSE midcap and BSE small cap indices was 33 per cent and 36 per cent, respectively.

The inherent risk in the fund’s portfolio, on account of exposures to small and midcap stocks, is mitigated by the high level of diversification. The fund held 74 stocks in August 2010, with top 10 holdings comprising only a quarter of the overall portfolio. In the last three years ended August 2010, the fund held an average of 51 stocks. Diversification shields the portfolio from the poor performance of some stocks.

Sector trends
Industrial products, consumer non-durables, pharmaceuticals and banking account for a large part of the portfolio with cumulative average exposure of 44 per cent over a three-year period.

Pharma and banking were among the top contributors to the overall gains of the fund. The positive trend in the fund’s NAVs has been primarily driven by exposure to Reliance Energy, Lupin and Clariant Chemicals.

—Crisil Fund Services