ABSL PSU NFO: A diversified portfolio can boost returns

Aditya Birla Sun Life (ABSL) PSU Equity Fund is open for subscription until December 23.

The fund is an open-ended scheme and will invest predominantly in public sector undertakings (PSUs) or companies where the government (State or Central) is a majority shareholder with at least 51 per cent shareholding.

The portfolio will have 25-35 stocks and be diversified in nature, focussing largely on sectors such as oil and gas, power, mining, defence, engineering and banking, financial services and insurance (BFSI).

The scheme’s stock selection will be based on a bottom-up approach.

The fund will be benchmarked to the S&P BSE PSU TRI. Over the past one, three, five and 10 years, the BSE PSU TRI index has delivered compound annual growth rates (CAGR) of 1.89, -2.38, -0.30 and -0.90 per cent, respectively.

Peer group performance

Two schemes — SBI PSU and Invesco India PSU Equity — follow the PSU theme and invest predominantly in equity and equity-related instruments of PSUs and their subsidiaries.

These funds invest 50-60 per cent in just the banking and energy sectors (including oil and gas, and power).

Their holdings are concentrated in a few stocks (to an extent of 40-50 per cent) such as SBI, BPCL, Power Grid, Indian Oil, NTPC and the newly listed player, IRCTC.

These funds have outperformed their benchmark index over one-, three-, five- and 10-year periods. In the long run — three- and five-year periods — while Invesco delivered returns of 4.40 per cent and 8.17 per cent, respectively, SBI recorded returns of -1.08 per cent and 1.26 per cent, respectively. Over the past one year, returns of these PSU funds have gained momentum on news that the Centre may divest its stake in a few PSUs such as Bharat Petroleum Corporation Limited (BPCL) and Container Corporation of India (CCI).

Thus, one-year returns from Invesco and SBI PSU funds were 15.38 per cent and 9.04 per cent, respectively, against the benchmark’s return of just 1.89 per cent

Invesco’s excellence could primarily be due to early/higher proportion of holding stocks such as BPCL, CCI, Power Grid Corporation and IRCTC, that delivered decent returns in the last year.

Suitability

Investments in PSU stocks, in most cases, have been a disappointment due to inferior returns, both in the short and the long term. Returns from PSU funds, although better than the benchmark, have not been higher than most diversified equity funds, going by their performance in the past.

Most sectors in which PSUs dominate are cyclical and thus the performance of companies are highly volatile.

Besides, PSU stocks trade on stock exchanges with thin liquidity, and are also vulnerable to government policies.

Thus, investors should remember that PSU funds suit only those with an appetite for high risk. Having said that, most PSUs have steady cash flows, and in the event of an economic uptrend, cyclical companies benefit from their monopolistic position post high returns, and give out high dividends.

Also, with divestment of the stake by the Centre on the cards, there could be value unlocking in companies up for disinvestment, going forward.

According to the fund house, ABSL PSU Equity Fund’s investment strategy will include picking up stocks of PSUs that could be involved in disinvestment and also have good growth prospects. This strategy might help the fund, as it may benefit from better prospects after the government holding comes down or after such companies are privatised.

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