UTI Mutual Fund prioritises consistent returns and lower risk which has resulted in a slower growth trajectory for the fund house. We view the consistency of internal processes as a positive. The collaboration with T. Rowe Price seems to have worked positively for the fund house in terms of leveraging expertise on the research.
We analysed two equity funds from UTI Mutual Fund stable in November 2020 and maintained our rating on UTI Equity Fund and upgraded the UTI Value Opportunities Direct share class from Bronze to Silver. Here’s a brief overview of these two funds.
UTI Equity Fund
Ajay Tyagi took over as manager of this fund in January 2016. Ajay focuses on investing in high-quality companies with a strong return on capital employed, which could lead to strong free cash flow generation. Furthermore, after SEBI’s new norms in 2018, Tyagi changed the fund's positioning from a large-cap bias to a multi-cap strategy, with 30%-40% in small/mid-cap stocks.
The investment process determines firms that have generated higher operating profits and demonstrated long-term ROE. The team emphasises the trends and patterns discerned from historical performance rather than from forecasts. From a qualitative aspect, it focuses on management quality, business model, and competitive advantages. Tyagi follows a bottom-up approach while picking stocks; his style is driven mainly by quality, growth, and valuation. He tends to avoid cyclical industries, which are highly volatile, and looks for firms with a strong track record of earnings growth over the past five to 10 years, with stability in margins and the ability to compound earnings higher than the market over the next five to 10 years with strong predictability.
We believe the investment strategy has become the guiding force for portfolio construction, and if the manager sticks to the investment process, the fund will generate healthy returns over the long run.
UTI Value Opportunities Fund
Vetri Subramaniam has been managing this fund since February 2017. The fund has the flexibility to position itself actively across the market-cap spectrum and has a value bent. Vetri Subramaniam follows a mix of top-down and bottom-up approaches while taking aggressive sector positions.
Although the fund transitioned categories in 2017-18, from large-cap to flexi-cap and from flexi-cap to value, the more recent change doesn’t have a material impact on the fund’s features. The adjustments in processes have started reflecting in the fund’s risk profile. It was historically positioned as a large-cap fund but can now vary its mid- and small-cap exposure more widely based on valuation differentials. The fund can potentially go up to 35% in small- and mid-cap stocks but currently has an allocation of about 25%-30%. Taking cash calls is not part of 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. We believe in his capabilities and expect the fund to outperform over a long period; however, these are early days for him and we would like to see more of his ability going ahead.
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