Will PSU Theme Bode Well For Aditya Birla Sun Life PSU Equity Fund?

Mutual Funds

This year in the maiden budget speech, finance minister, Ms Nirmala Sitharaman, laid a path for the future course with the endeavour to make India a US$ 5 trillion economy by 2024-25. And in the projected plan, she mentioned about the PSU sector:

“The minimum public shareholding in listed companies will be increased from 25% to 35%. A new electronic fund-raising platform will be created for listing social enterprises and voluntary organisations. The present policy of 51% stake of government in non-financial PSUs will be modified to include the stake of government-controlled institutions. Also, there will be disinvestment in Public Sector Undertakings (PSUs) with a target of Rs 1,05,000 for 2019-20.”

Accordingly, announcements and measures have been taken for strategic disinvestment to privatize selected PSUs. Hence, Aditya Birla Sun Life Mutual Fund is of the view that strategic divestment plans will be opportunities to unlock value for select PSU holdings …

It enjoys an almost monopolistic and low competition from private players in core sectors of the economy
It comes with a track record of having High Dividend Yield
It offers reasonable Return on Equity and steady cash-flow from operations

In order to bank upon the divestment opportunities, Aditya Birla Sun Life Mutual fund has launched an open-ended sectoral fund, Aditya Birla Sun Life PSU Equity Fund (ABSLPSUEF).

A sectoral fund is a sub-category of equity mutual fund that invests in companies of one particular sector of the market. Sector funds are a very-high risk-very-high-return investment proposition, as the fortune of the fund is closely linked to the undercurrents of a specific sector, although it could invest across the market capitalization spectrum.

Aditya Birla Sun Life PSU Equity Fund (ABSLPSUEF) will predominantly invest in Equity & Equity Related instruments of Public Sector Undertakings within the prescribed limit of the AMFI mandate, a minimum of 80%. Also, it may take a smaller exposure to equity and equity-related securities of other companies, debt and money market Securities, and Units issued by REITs & InvITs.

From a risk standpoint, given the portfolio allocation is skewed heavily to equity ABSLPSUEF which is a high-risk contender, and thus suitable only for investors who have a high-to-very-high-risk appetite and an investment horizon of at least 5 years.

[Read: How to evaluate your risk appetite and risk tolerance level?]

From a tax implication standpoint, the Aditya Birla Sun Life PSU Equity Fund will be classified as an equity-oriented mutual fund scheme. Hence, if redeemed within a holding period of one-year, Short Term Capital Gain Tax (STCG) tax @ 15% will apply. And if redeemed after a period of 1 year, the Long-Term Capital Gains (LTCG) in excess of Rs 1 lakh will be taxed @10%.

Table 1: Details of Aditya Birla Sun Life PSU Equity Fund

Type		An open-ended equity scheme following PSU theme	Category	Thematic/Sector
Investment Objective		To provide long term capital appreciation by investing in equity and equity related instruments of Public Sector Undertakings (PSUs). The Scheme does not guarantee/indicate any returns. There can be no assurance that the schemes’ objectives will be achieved.
Min Investment		Rs 500 and in multiples of Re 1 thereafter	Face Value	Rs 10 per unit
Plans	Regular Direct *Default option		Options	Growth Dividend (Pay-out Facility)
Entry Load		Nil	Exit Load	For redemption / switch-out of units on or before 90 days from the date of allotment: 0.5% of applicable NAV. For redemption / switch-out of units after 90 days from the date of allotment – Nil
Fund Manager		Mr Mahesh Patil	Benchmark Index	S&P BSE PSU TR Index
Issue Opens:		December 09, 2019	Issue Closes:	December 23, 2019

(Source: Scheme Information Document)

How will the scheme allocate its assets?

Under normal circumstances, it is anticipated that the asset allocation of ABSLPSUEF will be as follows:

Table 2: ABSLPSUEF’s Asset Allocation

Instrument	Risk Profile	Normal Allocation (% of total Assets)
Equity & Equity Related instruments of Public Sector Undertakings.	High	80%-100%
Other Equity & Equity Related instruments	High	0%-20%
Debt and Money Market Instruments	Low to Medium	0%-20%
Units issued by REITs & InvITs	Medium to High	0%-10%

Public sector entities/undertakings to include those entities:

In which the Government of India / a State Government has atleast 51% shareholding.
Notified / qualifies as public sector entities, in accordance with norms / notified by Government of India / a State Government the debt of which is guaranteed by Government of India / a State Government.

The Scheme may also invest upto 50% of the net assets of the scheme in derivative instruments for the purpose of hedging and portfolio balancing and other uses as may be permitted under SEBI (MF) Regulations. The cumulative gross exposure to equity, equity related instruments, debt, money market instruments and derivatives shall not exceed 100% of the net assets of the scheme. Under normal circumstances the scheme shall not have an exposure of more than 20% of its net assets in foreign securities. However, the AMC with a view to protecting the interests of the investors, may increase exposure in foreign securities as deemed fit from time to time. Subject to SEBI (MF) Regulations and the applicable guidelines issued by SEBI, the scheme intends to invest in repo /reverse, repo in corporate debt securities and may engage in stock lending/borrowing. The Scheme may also invest up to 20% in securitized debt instruments. The Scheme may invest in mutual fund units as permissible. The scheme will not invest in Credit Default Swaps and shall not indulge in short selling. (Source: Scheme Information Document)

What will the Investment Strategy be?

The primary investment strategy of the Aditya Birla Sun Life PSU Equity Fund would be to generate long term capital appreciation by investing in equity and equity related instruments of Public Sector Undertakings (PSUs).

The scheme may continue to hold companies in the Scheme which subsequently may get privatized or where the Government shareholding gets reduced through the process of disinvestment (but minimum PSU/ Central government / state government stake of 25% or single largest shareholder).

The scheme will follow a bottom-up approach to stock-picking. All companies selected will be analysed taking into account the business fundamentals like nature and stability of business, prospects of future growth and scalability, financial discipline and returns, valuations in relation to broad market, expected growth in earnings and the company’s financial strength and track record.

The Scheme may also invest a small portion of its corpus in money market instruments to manage its liquidity requirements. The fund investment in debt securities and money market instruments issued by corporate and/or state and central government with the aim to controlling volatility and providing cash flows on a continuous basis.

Rigorous in-depth credit evaluation of the securities proposed to be invested in will be carried out by the investment team of the fund manager for its fixed income investments.

In addition, the fund manager and his team will study the macroeconomic conditions, including the political, economic environment and factors affecting liquidity and interest rates. The portfolio shall be structured so as to keep risk at acceptable levels and invest across Market cap. This shall be done through various measures including:

Ongoing review of relevant market, industry, sector and economic parameters
Investing in companies which have been researched. Companies deemed to be leaders in their respective products/industry
High quality businesses exhibiting favourable economics, capable and trustworthy management teams
Other parameters like operating profit margin, net profit margin, P/E ratio, better earnings visibility, etc.
Investments in debentures and bonds will usually be in instruments which have been assigned investment grade ratings by any approved rating agency.

The scheme may also invest in ADR/ GDR and equities of listed overseas companies. These investments will be made in line with the RBI and SEBI guidelines and will be within the limits prescribed by SEBI/RBI from time to time.

The fund manager may, from time to time, review and modify the Scheme’s investment strategy if such changes are in the best interests of the unitholders and if market conditions warrant it. Investments in securities and instruments not specifically mentioned earlier may also be made, provided they are permitted by SEBI/RBI and approved by the Trustee.

Who will manage Aditya Birla Sun Life PSU Equity Fund?

Mr Mahesh Desai is the designated Fund Manager of the Aditya Birla Sun Life PSU Equity Fund.

Mr Desai holds a Bachelor’s degree in Electrical Engineering, completed his Master of Management Studies (MMS) from Jamnalal Bajaj Institute of Management Studies situated in Mumbai, and a Chartered Financial Analyst from the ICFAI Institute.

He has over 28 years of experience in fund management, equity research and corporate finance. Prior to joining ABSLAMC, he has worked with Reliance Infocom Ltd. in Business Strategy, and as a Sr. Research Analyst with Motilal Oswal Securities and Parag Parikh Financial Advisory Services.

At the fund house, currently, he manages/co-fund manages include Aditya Birla Sun Life Focused Equity Fund, Aditya Birla Sun Life Frontline Equity Fund and Aditya Birla Sun Life Equity Hybrid ’95 Fund.

The outlook for Aditya Birla Sun LIFE PSU Equity Fund

In an endeavour to achieve the stated objective of the scheme, ABSLPSUEF will predominantly invest in equity related instruments of Public Sector Undertakings (PSUs).

These include businesses in:

Sensitive sectors like Defense Equipment, Aeronautics, and Ship-Building
Essential Infrastructure like roads, highways, railways, dams, airports, ports
Exploration and production of oil, coal, iron ore, steel and other natural resources
Utilities like power generation & distribution, gas distribution, fuel refining & marketing
Banking, insurance and financial services

As per the product brochure, the Aditya Birla Sun LIFE PSU Equity Fund will be a focused one with a 25-35 stock portfolio, and as per market cap basis, 60%-70% of the portfolio will be large-cap oriented while there would be marginal allocation made to mid and small-cap companies, which may range from 20-30%.

But the fortune of the fund is closely linked to the performance of the PSUs from sectors like oil, gas, power, mining, banking, financial services and insurance sector, defence, and engineering which are of defensive sector.

And speaking of PSU disinvestments, the government’s track record has failed to achieve the actual target of disinvestment. As per the data released from DIPAM, it has been missed most of the time, as seen below.

Graph: Historically, PSU disinvestments, missed most targets

(Source: Department of Investment and Public Asset Management (DIPAM))

And even for the current year, the target is likely to be missed; due to liquidity concerns in the current continued economic slowdown, many buyers aren’t available in the market to absorb the stake sale. Besides, many PSUs aren’t available at fair valuations that make a very compelling investment proposition.

Hence, the construction of the portfolio would be a challenge for the fund manager and his team to spot opportunities in the current environment and the risk management measures they adopt.

Aditya Birla Sun Life PSU Equity Fund is a sectoral fund within the equity universe, making it the riskiest investment proposition as it is placed at the higher end of the risk-return spectrum, particularly when bets in case of most others are at odds. So, consider the implications involved before investing in the Aditya Birla Sun Life PSU Equity Fund.

Hence invest in a sectoral fund only if you: