UTI Dividend Yield Fund is a competent fund drifted towards a pure dividend yield play. We're impressed with Kulkarni’s disciplined approach and fine execution across various market conditions.
Investors should note that Kulkarni is focused mainly on delivering superior risk-adjusted returns against peers and reducing risk by investing in quality issues with deleveraged balance sheets. Such a strategy is most likely to succeed in downturns. Its relatively conservative nature can cause it to underperform in market rallies. Nevertheless, her investment style will hold the fund in good stead over a full market cycle.
- Fund: UTI Dividend Yield
- Category: Flexi Cap
- Star Rating: 3 stars
- Fund Manager: Swati Kulkarni
- Analyst Rating: Bronze
- Date of Analysis: May 2018
- Morningstar Analyst: Nehal Meshram
Investment Process
Swati Kulkarni has executed the process across various market conditions with a high degree of success. The process is methodical and cohesive. She uses this criterion to filter her investment universe but does not make investment decisions solely based on dividend yield. Rather, she prefers companies that enjoy sustainable cash flows, strong balance sheets, good corporate governance standards, and scalable business models with competitive advantages.
When evaluating companies, Kulkarni uses relative valuation techniques with quantitative parameters and prefers issues that are cheaper than their peers and historical valuations. She avoids companies that are overly leveraged. The investment team meets regularly to discuss and narrow the investing field. Fund manager views and sell-side research are incorporated to strengthen assumptions/forecasts, with a view to making the research process holistic.
Type of stocks
Vetri Subramaniam ensured that all strategies are well differentiated and has driven more style discipline among the managers. Following that, the fund’s benchmark was changed to Nifty Dividend Opportunities 50 Index. Subsequently, the fund scaled up to become a pure dividend yield fund and currently invests at least 75% of its portfolio, as against 65% earlier, in stocks with high dividend yields. The manger’s adherence to her investment mandate is borne out by the fact that the fund’s dividend yield consistently betters that of the Dividend Opportunities 50 Index.
Market cap exposure
The fund has also transitioned from being a large-cap fund to flexi cap by increasing allocation to the small and mid-cap segment, as its relatively lower allocation to small/mid-caps had restrained the fund from fully capturing the market rally. The fund now maintains around 65% in large caps and 35% in small caps and mid-caps.
Sectors
Exposure to individual stocks is capped at 8%, individual sectors at 30%, and exposure to the top 10 stocks is capped at 55%.
With the fund following a buy-and-hold strategy, its portfolio turnover ratio is lower than peers'. The portfolio changed significantly compared with last year, especially at a sector level. The Financial sector has always featured among the top sectors in the portfolio; however, with the change in the benchmark, the allocation to this sector has been brought down significantly. At the same time, Kulkarni has increased the exposure to Infotech stocks, citing strong balance sheets, return on equity/return on capital employed, and attractive valuation. The fund also has a higher position in Metals, Oil and Gas, as these sectors typically have stocks that offer high dividend yields.
Performance
Under Swati Kulkarni’s watch, from December 2005 to April 2018, the fund has delivered 14.41% returns, close to the category average and ranked in the second quartile. Its risk/reward profile has been more impressive, beating 75% of its peers on a Morningstar Risk-Adjusted Return basis. However, on a one-, three-, and five-year basis, the fund’s performance has been lower than the category average. The underperformance of the fund during these periods could be mainly attributed to its restricted mandate to invest in high dividend yield stock due to which the manager could not take exposure in certain stocks/sectors--for example, the consumer and pharma sectors. This criterion is often a constraint--eliminating names that are otherwise attractive but do not qualify on dividend yield.
The fund’s position in metal and energy also contributed negatively to the performance, but these sectors started paying off and the fund bounced back in 2016. The fund’s year-to-date return looks good, as the fund returned 2.06% as against negative 1.11% of its category average.
Its increased focus on style discipline, together with broadening the fund mandate by increasing exposure in the small- and mid-cap space, has helped the fund in generating higher returns. Furthermore, with the recategorisation, we expect the fund to outperform its category as it will be compared with the appropriate peer group.
