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S. Vaidya Nathan

INVESTORS in the UTI Services Sector Fund can stay invested now and evaluate their exposures once the market's bearish phase runs out. Business Line had recommended paring of exposures in April 2002 and December 2002. The portfolio has, by and large, remained unchanged in the last three months or so.

Frontline finance and IT sector stocks have taken a valuation knock in the last month or so. The UTI Services Sector Fund is laden with exposures in these two sectors. Close to 55 per cent of net assets are locked up here. In this context, it may be better to wait for the near-term uncertainties to settle before taking any investment action in relation to this fund.

The UTI Services Sector Fund has had a mixed track record. The boom in a wide swathe of information technology, media and telecom stocks helped the fund get off to a good start. The exposures were in stocks that carried a high degree of risk. The meltdown in IT /media stocks after March 2000 led to a quick recast of the portfolio, which now tilts towards frontline stocks.

In the last year, it has turned in returns of about 7 per cent when comparable benchmarks have been flat. Since its launch in May 1999, the returns are at 22.5 per cent. But the three year annualised negative returns of 17.5 per cent clearly show the extent to which the fund rides on its performance in the bull-run of 1999-2000. The fund provides an avenue to capitalise on the growth opportunities in the service sector. But fresh exposures can be avoided now as returns of the kind managed by the fund in the past may be tough to replicate.

Suitability: As a sector-specific fund, the risks associated with UTI Services Sector Fund are much higher than a diversified fund. But the investment brief for the fund is fairly wide. As a result, its portfolio is much more diversified than funds with focus on sectors such as IT, consumer products and pharmaceuticals. A wide range of services companies provides a larger investment universe.

The shift away from stocks of the Global Tele-Systems, SSI and Himachal Futuristic genre has reduced the risk profile considerably. But, the IT exposures, at about 21 per cent of net assets, are still fairly high. This is likely to be a continuing feature of the portfolio as the IT sector is still the most promising growth story.

Portfolio overview: A scrutiny of the portfolio in the last year shows the following trends:

The fund continues to have a small asset base of about Rs 55 crore. This gives it considerable flexibility in churning the portfolio without incurring sizeable impact costs. It has also remained fully invested with over 90 per cent of assets in equities.

The core of the portfolio for well over a year now has been IT and banking stocks. At the end of February 2003, the fund had 34 per cent in finance stocks and 21 per cent in IT stocks.

This fund has been heavy on finance stocks for a longer time than any other fund except for Morgan Stanley. But it has not reaped the benefits of the re-rating in this sector to any noticeable extent.

The focus on frontline stocks such as SBI, HDFC Bank, ICICI Bank and HDFC has ensured that the re-rating story in the finance sector has not beneficially influenced the NAV. It is the second-rung stocks such as Punjab National Bank, Canara Bank, Bank of India, Bank of Baroda and Vysya Bank, among others, that are at the forefront of the rally.

A similar trend is also visible in regard to the IT component of the portfolio. The fund has largely stayed with the likes of Infosys, Wipro and Satyam Computer.

But much of the upside in the IT sector has been in stocks such as Mastek, MphasiS BFL, Digital Equipment, Infotech Enterprises to name a few. Satyam, in fact, has been in a state of steady decline.

As a result of this portfolio tilt, the improvement in the valuation of IT stocks has not percolated to the NAV. In the past month, the decline in frontline stocks - which have had more downside risk in the last 18 months - has also affected the NAV.

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