PSU Funds Set To Woo Investors

At a time when the equity market is trading at its lifetime high with stretched valuation,

At a time when the equity market is trading at its lifetime high with stretched valuation, there are very few pockets that give margin on safety and PSE stocks are one of them. The article highlights the reasons why PSU funds are becoming attractive

In a series of bizarre events in the last week of October 2021, we saw huge volatility in the shares of IRCTC. First the shares of IRCTC crashed over 20 per cent on October 29 only to recover most of its losses during the course of the day. The steep fall in the share price of IRCTC was due to the statement issued by the Ministry of Railways October 28 saying that they would take a 50 per cent share of the conve- nience fee earned by the IRCTC, which remains one of the key sources of revenue for the IRCTC. This was withdrawn within 19 hours after the announcement, which helped the shares to recoup losses.

What this entire event signifies is that the government is now more sensitive towards minority shareholders. It also sends a positive signal to the investor community, which is the need of the hour as the government has a huge disinvestment target for the year and such abrupt decisions that adversely impact the rights of minority investors will not help it with the disinvest- ment process. It further shows the change in the stance of the government towards the treatment of PSUs and their minority shareholders. The equity market is also acknowledging it as is reflected in the performance of the stocks dedicated to the PSU theme.

Nifty PSE, for instance, has generated return of 82.53 per cent in the last one year. Nifty PSE is an index that comprises 20 stocks that are listed on the National Stock Exchange (NSE) where 51 per cent of a company’s outstanding share capital is held by the central or state government, or both, directly or indirectly. During the same period, Nifty 50 has given a return of 51.38 per cent. The average gain by these stocks in the last one year has been more than 90 per cent. The graph below shows the last one year return of BSE 500 and Nifty PSE.

Last One Year Return of BSE 500 and Nifty PSE

Although in the last one year the performance of the PSE stocks has been phenomenal, if we take a longer time horizon of five years, including last year of outperformance, we see that Nifty PSE has given negative return of -1.92 per cent annually. xThe following table shows the performance of Nifty PSE in the last five years.

Hence, at a time when the equity market is trading at its lifetime high with stretched valuation, there are very few pockets that give margin on safety and PSE stocks are one of them. As of November 8, Nifty 500 was trading at PE of 27.47 and a dividend yield of 1.02 per cent whereas Nifty PSE Index was trading at PE of less than 7 and dividend yield of 5.67 per cent. This dividend yield is higher than many bank fixed deposits for one year. Several PSU banks are trading at price-to-book value of less than one. Non-banking PSUs are also trading at a discount to historical averages. Despite all the recent outperformance, it is still trading below its all-time high. Someone with good stock-picking ability can definitely go and conduct due diligence and select the right kind of stocks while others can rely on thematic funds based on PSUs.

PSU Theme Mutual Fund
There are currently only four funds, including one ETF, with the PSU theme. There is one more ETF and it’s a fund of fund with majority of stocks from PSUs. Bharat 22 ETF is an open-ended exchange traded fund investing in S & P BSE Bharat 22 index. The scheme invests in 22 companies including three private sector stocks and 19 PSUs. However, almost 40 per cent of the portfolio is with top three private sector stocks. Hence, it does not qualify for the PSU theme. Therefore, we have taken only three funds and one ETF for our analysis. The following table shows the performance of PSU funds and indices

From the table above it is clearly visible that all the funds have been able to outperform the BSE 500 in all the time durations over the last one year ending November 8. For example, year-till-date, BSE 500 has generated return of 34.55 per cent. However, all the funds have given return of more than 45 per cent in the same period. Nifty PSE has in the same period generated return of a shade below 60 per cent. The best performing fund has been Aditya Birla Sun Life PSU Equity Fund, which generated return of 50 per cent.

What is also good to note from the table is that all the funds have maximum drawdown lower than BSE 500 as well as Nifty PSE except for CPSE ETF. A drawdown is the total change in price from one financial peak to the next financial valley. Drawdowns represent the largest loss potential for an investor in the given period. So in the last one year these funds have seen their value declining by as much as 33 per cent. The following table shows the risk return statistics of the funds :

Investment Timing
With all the outperformance and better prospect of returns, you may jump in to take exposure to these thematic funds. Neverthe- less, you should always note that these are thematic funds and should be treated accordingly as they are highly volatile and many of them perform in cycles. An analysis of the benchmark of funds shows that there is higher concentration of stocks towards the energy sector. Companies from this segment, including power, constitute 62 per cent of the total weight of the benchmark.

The recent better performance of Nifty PSE can also be attrib- uted to a rise in energy prices. Therefore, you can only make tactical allocation towards such funds. Entry as well as exit from the funds should be timed in a way that you are not caught on the wrong side of the theme performance. Besides, they should not form more than 5 per cent of your portfolio. Also, remember that it should not be assigned to any of your financial goals on account of the volatility factor.