Mutual funds ride on public sector IPOs

Mutual funds ride on public sector IPOs
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First Published: Wed, Sep 16 2009. 09 40 PM IST

More investment: NHPC’s Lower Subansiri project at Gerukamukh on the Assam-Arunachal Pradesh border. IPOs of public sector units such as NHPC have created demand for funds dedicated to the sector. Ind
More investment: NHPC’s Lower Subansiri project at Gerukamukh on the Assam-Arunachal Pradesh border. IPOs of public sector units such as NHPC have created demand for funds dedicated to the sector. Ind
Updated: Wed, Sep 16 2009. 09 40 PM IST
Mumbai: Mutual funds are trying to take advantage of the government’s disinvestment cycle beginning with the initial public offerings in NHPC Ltd and Oil India Ltd by launching dedicated funds to invest in public sector units (PSUs).
At least two fund houses have filed their offer documents with the Securities and Exchange Board of India (Sebi), the capital market regulator, and more are in the pipeline. Even fund houses that have no immediate plans to launch dedicated PSU products say they will play the theme through investment plans.
SBI Funds Management Pvt. Ltd has filed an offer document with Sebi for a fund that will invest in public sector companies. Sundaram BNP Paribas Asset Management Co. Ltd has filed a document for Sundaram BPN Paribas Select Thematic-PSU Opportunities Fund.
More investment: NHPC’s Lower Subansiri project at Gerukamukh on the Assam-Arunachal Pradesh border. IPOs of public sector units such as NHPC have created demand for funds dedicated to the sector. Indranil Bhoumik/Mint
Both these schemes will invest at least 65% of their portfolio in equity shares of listed PSUs. Religare Mutual fund is also planning a PSU fund, said an official from the fund house, who didn’t want to be named.
India has 36 asset management companies (AMCs), with total assets under management of Rs7.49 trillion at the end of August.
Fund managers say more schemes will be launched to play the PSU theme. The fund houses will try to garner returns by investing in stocks of state-owned companies that are either about to get listed on the exchanges or have been recently listed.
Investments during listing enhance the prospects of profit booking in the long run. After NHPC and Oil India, Bharat Sanchar Nigam Ltd is one of the next big public offerings.
“We are excited about the ongoing disinvestments process by the PSUs. We would not launch any PSU-dedicated equity fund at the moment, but we will try to take advantage by changing our asset allocation strategy through some of our existing equity diversified funds,” said Sundeep Sikka, chief executive officer of Reliance Capital Asset Management Ltd. The company manages assets worth Rs1.17 trillion.
Equity-oriented PSU funds have been launched only twice in the past, and both were floated by the oldest mutual fund house in the country, UTI Asset Management Co. Pvt. Ltd. The firm in 1993 launched UTI Master Growth Fund, which invested at least 50% of its assets in PSU stocks. The fund, with assets worth Rs243.25 crore, was merged with UTI Top 100 Fund last year.
The company launched another PSU-dedicated scheme called UTI PSU Fund in 2004, with assets of Rs18.09 crore, which was merged with UTI Index Select Fund in April 2007.
Traditionally, mutual funds have been the biggest buyers of PSU stocks during disinvestment. Many mutual fund experts believe PSU stocks can be the best bet for investors in the long run. This is because the government’s capital-raising strategy has changed over time. Until about two years ago, the government was considered conservative and hence, a majority of PSU shares used to be held by it.
As the markets evolved, the government is now more liberal towards disinvestment of its stakes in PSUs to raise capital. This change in tack would provide more clarity about the government’s moves, unlock the value of PSU companies and help fan positive sentiment among investors towards PSU shares. Fund managers are betting on this sentiment by launching new equity-related PSU funds.
“PSU stocks are generally available at a discount as compared with other companies. So, there is clearly an opportunity for mutual fund investments,” said Dhirendra Kumar, CEO, Value Research India Pvt. Ltd, a New-Delhi based mutual fund tracking firm.
“The businesses of PSUs are very focused and in the long run, we are very optimistic about such companies. Though the performance of PSU companies is very cyclical, in a span of three-five years, PSU stocks should outperform the markets,” he added.
According to a recent report by Prime Database, a New-Delhi-based primary market investment tracking firm, the scope for PSU IPOs is huge.
“The divestment process can begin with a bang and continue to create new milestones. With all these offerings, the shape and size of the Indian capital market will change for ever, and for good,” said Prithvi Haldea, chairman and managing director of Prime Database.
Still, there are concerns. There are 80 listed PSU firms on the Bombay Stock Exchange. In terms of year-to-date gains, the benchmark Sensex has outperformed PSU stocks. While the Sensex has risen 72.87% during the calendar year, the PSU index has managed a gain of 66.45%.
Some fund managers are sceptical about the launch of dedicated PSU equity funds, saying a limited universe of asset allocation among PSU firms could crimp returns.
“We will not launch any thematic PSU fund at the moment, since the opportunity in the space is limited. Even with more PSU companies getting listed, we will rather prefer to watch how the market evolves. But we may invest in PSU companies through some of our existing schemes,” said Jaideep Bhattacharya, chief marketing officer, UTI Asset Management, which manages Rs73,926 crore of assets.
Another risk, according to N. Sethuram, chief investment officer of Shinsei Asset Management (India) Pvt. Ltd, is that PSUs are not an all-weather investment. “Themes need to be useful across time bands. We need to see how far they are useful,” he said. “PSUs tend to perform in line with the government. The performance is subject to the government of the day and policy risks.” n.subramanian@livemint.com
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First Published: Wed, Sep 16 2009. 09 40 PM IST
More Topics: Fund managers | Religare | NHPC | Oil India | Sebi |