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Stocks of government-run companies continue to trail a sharp rebound in the equities market this financial year.

The National Stock Exchange’s Central Public Sector Enterprises Exchange Traded Fund (CPSE ETF) underperformed the benchmark Nifty by a wide margin in the last four years. So far, in FY21, the Nifty CPSE rallied 45%, its best performance in five years but nowhere near the Nifty’s 72% rise.

CPSE ETF is a passive investment fund created to help the government partly sell stakes in select CPSEs. It is an open-ended, semi-diversified, thematic and passively-managed ETF, which tracks and offers returns corresponding to the Nifty CPSE Index. The CPSE ETF comprises a dozen state-run firms.

According to Bloomberg data, the Nifty CPSE index lost 42% in FY20, while the Nifty was down just 26%. In FY19, Nifty CPSE index dragged 6% while the Nifty had gained 15%.

Dhaval Kapadia, director, portfolio specialist, Morningstar Investment Adviser India Pvt. Ltd said there are multiple reasons for the Nifty CPSE to underperform benchmarks. “The CPSE ETF fund is a concentrated mix leaning towards power and oil stocks, and underperformance in these handful of stocks drag the entire indices. Also, risks arising from government-related actions, which may not necessarily be always investor-friendly, affect their performance," he added.

However, in the last few months, such stocks have started gaining traction as the government has made several announcements of strategic sales, divestments and privatization. Starting October, PSU stocks have seen a strong rally to drive the Nifty CPSE ETF index higher. Since October last year, the Nifty CPSE jumped 45%, beating the Nifty’s 31% rise.

Arun Kumar, head of research, FundsIndia.com said, “As there were talks of strategic divestment and privatization, along with early signs of economic recovery, government-led stocks started to attract investors from October." Such stocks are way better in dividend yields, which makes CPSE ETFs attractive. As on 23 February, dividend yield of Nifty CPSE is 4.8%, while it is 1.08% for Nifty. Dividend yield measures the amount of cash dividends paid to shareholders, relative to the market value per share.

However, Kumar says there is an indication that government may not sell shares in listed stocks by bunching them together via the ETF route but stick to directly offloading either through strategic divestment or privatization.

Prime minister Narendra Modi recently announced investment opportunities of 2.5 trillion as part of the national asset monetization through the sale of around 100 assets of central public sector companies. He said it was not possible for the government to remain owner of so many companies and that it should instead focus on public welfare and development.

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