Why was UTI Wealth Builder Fund-Series II launched in 2008 when the equity market was in turmoil?
The fund was launched in the last quarter of 2008. In the peak of a bull run, investors would not consider gold and equity in combination since they would not want to dilute returns from equity by holding gold. They were more concerned about risk than returns. They began to realize that there is risk associated with equity and it is always prudent to allocate money to different asset classes. In the financial turmoil of 2008, investors were flocking to gold. That is why we came up with this product.
What is the logic behind combining three asset classes—equity, gold, debt—into one fund?
By combining gold with equity, we are able to offer more stable returns with less volatility, as compared with a pure diversified equity fund. On the equity front, UTI Wealth Builder Fund-Series II functions as a pure diversified equity offering. But combining it with gold helps cushion the volatility. Since gold and equity are two counter-cyclical assets, we felt that it was the best combination and a smart diversification option to offer investors.
UTI Wealth Builder Fund-Series II offers several advantages to investors. If one wanted to invest in a gold exchange traded fund (Gold ETF), they would need to have a demat account and go through stock exchanges and a broker. Here is a product where you can get exposure to gold by going directly to the mutual fund. There is no need for a demat account. Since the asset allocation to equity is a minimum of 65%, you can get the tax benefit of investing in an equity fund, which means that long-term capital gains are nil and dividends are tax-free.
What contributed to the fund’s impressive performance?
“By combining gold with equity, we are able to offer more stable returns with less volatility,” says Harsha Upadhyaya, UTI Mutual Fund
It was launched when equity valuations were close to historical lows and gold was trading at around Rs12,500/10g in December. We invested in gold at that level and gradually built up equity positions over a span of about two-and-a-half months. We were almost fully invested by February. Our position in gold paid off first, with gold rallying to over Rs15,000/10g in February. We reduced our exposure to gold to some extent at those levels by booking profits. Now equities have begun to perform and it has added to the performance of the fund.
We feel that UTI Opportunities works more as a diversified equity fund and not as an opportunity fund should. What is your view?
I do not agree. It is being managed true to its mandate of a sector rotation fund. The fund has also benefited from many opportunistic and aggressive stock calls. I took over the fund in December 2006. At that point in time, it was overweight in FMCG, where it had invested at least 35% of the fund. It was also overweight on the auto sector. Once I took over, the portfolio was restructured and we got into power, capital goods, banking and infrastructure. Simultaneously, we cut positions in the sectors on which we were overweight. That was the first sectoral change that we implemented, which worked right up to the first quarter of 2008. So we have been taking aggressive sector calls. The top three sectors have always been more than 45% of the portfolio. If you take the top five sectors, it will be around 65-70%.
Why does UTI Opportunities take heavy cash calls?
What tends to get missed out is the derivatives position that we take in this fund. And due to that we have to maintain a particular cash position. Take Hero Honda, for example. It has been the top holding of the fund for around a year. We held that position in derivatives for a considerable time. It began to appear on the equity screen only when we converted it into a stock position. It was always quoting at a discount in derivatives so we were getting additional 1% or 2% arbitrage gains.
Such gains help the fund in a falling market because even if you assume that the capital has not appreciated, you are getting these additional gains. Generally, there are several such positions in the fund all the time.
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