UTI Equity Fund upgraded to Bronze

Oct 31, 2019

UTI Equity Fund

  • Analyst: Nehal Meshram
  • Analyst Rating: Bronze
  • Fund Manager:  Ajay Tyagi
  • Date of Analysis: October 2019

UTI Equity Fund, launched in 1992, is one of the oldest funds in the Indian mutual fund industry. There has been a change at the helm. Ajay Tyagi took over as manager in January 2016, following Anoop Baskar’s exit. Tyagi has been with the fund house for the past 18 years. He is an able portfolio manager, and we like his distinctive long-term investment style, which has delivered superior performance for the fund in the past two years.

The fund was historically managed as a large-cap-oriented fund, but with the recent regulatory changes, it was merged with UTI Bluechip, retaining the characteristics of UTI Bluechip, which is a multi-cap fund. Despite this, the fund continues to position itself in the growth quadrant, with Tyagi following a bottom-up-driven approach while picking stocks. His style is driven mainly by quality, growth, and valuation, where quality signifies a high and sustainable return on capital employed, growth by reinvestment of internal cash flows, and valuations determined by consistency in cash flow generation. Relying on relative valuations to make investment decisions, the team prefers stocks that are cheaper than peers and their historical valuations. They focus on parameters such as enterprise value/earnings before interest, price/equity, price/book, return on assets, and return on equity but are willing to be flexible with valuations, especially in rising markets.

The fund maintains a diversified portfolio with about 50-60 stocks, which is still higher than the median count of the category. The turnover of about 30% as of 2018 demonstrates the manager’s patience and conviction in the outcomes of the investment process. Moreover, the restructuring in process and portfolio tweaking have started showing a positive outcome. The fund displayed above-average returns during the manager’s tenure and is ranked as a second quartile performer. Our conviction in the strategy remains high, underpinned by our confidence in the portfolio manager, and the consistent application of a strong investment process. The execution of the fund has been good since the time Tyagi started managing the fund. Moreover, the restructuring in process and portfolio tweaking have started showing a positive outcome. We believe by continuing to focus on quality and with a competitive expense ratio it will lead to the best risk-adjusted return in the long run. Hence, we have upgraded the Morningstar Analyst Rating to Bronze.

 UTI Value Opportunities Fund

  • Analyst: Nehal Meshram
  • Analyst Rating: Bronze
  • Fund Managers:  Vetri Subramaniam and Amit Premchandani
  • Date of Analysis: October 2019

UTI Value Opportunities (erstwhile UTI Opportunities) witnessed a recent change in its Morningstar Category and portfolio manager, but despite these changes, the investment strategy remains robust and doesn’t have a material impact on the fund’s prospects. While the fund may court significant volatility at times because of its value bent and increased exposure in the small/mid-cap space, its low fees, deep research, and strong investment team lead us to maintain a Morningstar Analyst Rating of Bronze.

The fund is jointly managed by Vetri Subramaniam and Amit Premchandani. Subramaniam replaced Anoop Bhaskar in February 2017, while Premchandani started managing the fund in February 2018. Lead manager Subramaniam is an experienced and skilled manager. In his previous stint at Invesco, he sailed through the global economic slowdown fomented by the financial crisis of 2008 and built the business from scratch. Subramaniam brought about effective changes to the fund’s investment strategy. The fund, recently categorised as a value fund, was, since 2017, being managed as a flexi-cap fund, as against a previous large-cap bias, through a gradual increase in the allocation to the small/mid-cap space. He also started managing the portfolio with a value bent since the time he took over the strategy.

To ensure all the strategies within the fund house are well differentiated, Subramaniam reorganised the equity team last year, aiming to push for style discipline among the managers. The fund house last year merged UTI Multi Cap (shadow-managed by the research team) with UTI Value; however, merging the funds was not very disruptive as 65%-70% of the UTI Multi Cap portfolio overlapped UTI Value's.

The manager follows a mix of top-down and bottom-up approach. The robust investment process favours sectors that have a strong probability of surprising positively on both earnings and operating cash flow growth. While analyzing stocks, he follows a barbell strategy and invests in growth companies--even at a premium, if he thinks the valuations are justified and the company has the potential to generate economic value through the cycle. He pays heed to the relative valuations and looks for potential for mean reversal, focusing mainly on depressed stocks with low return of capital employed and return on equity. The recent restructuring and tweaking are expected to bring a positive outcome over the long run but we need time to see some signs of a sharp turnaround before we upgrade the rating.

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