Why I Won't Invest in the Further Fund Offer of the CPSE ETF:
(Previous blog dated 19Mar2014 on CPSE ETF)
The
Government of India has come out with a further fund offer (FFO) of the CPSE
exchange traded fund or CPSE ETF, which is managed by the Reliance Nippon Life
Asset Management Ltd or Reliance Mutual Fund. This FFO opens on 18 January and
closes on 20 January 2017 for non-anchor investors. The government wants to
raise Rs 4,500 crore (with a green shoe option of another Rs 1,500 crore) from
this offer.
Here
I briefly analyse of the offer of the units of CPSE ETF and I'm giving my
reasons why I will not invest in this further fund offer of CPSE ETF:
1.
High Concentration Risk:
There
are only ten stocks in the CPSE ETF mutual fund. All of them belong to the
public sector known as central public sector enterprises or CPSEs. Top four
stocks account for around 74% of total value of the fund. Such high
concentration is vulnerable to greater risks and against the principles of
diversification. As noted, the performance of the ETF depends mostly on four
PSUs (public sector undertakings), namely, ONGC, Coal India, IOC and GAIL.
Even
among sectors there's little diversification. Energy sector (oil, gas and
minerals) accounts for 77% of the total value, which is not desirable. Financial
services is one of the high growth sectors in India, but this ETF has only less
than 11% exposure to this sector.
The
natural resources sector is not a growth sector in India, though these
companies have huge assets and some of them are in monopoly businesses. It's
inexplicable how the market regulator SEBI has allowed such an ETF with just 10
stocks, all belonging to the public sector, with high exposure of 77% to
natural resources sector.
2.
Indian Government Is a Bad Manager:
As
is widely known, governments in India are known to arm-twist PSUs to suit their
political and social needs, crippling the ability of the management of the
companies to deliver decent performance. Every year, the Government forces
these companies to declare higher dividends (ignoring the internal needs of the
individual companies for capital expenditure) to bridge government's recurring
fiscal deficit.
The
Comptroller and Auditor General of India (CAG) brings out a yearly report on
the central public sector enterprises (CPSEs), pointing out the poor performance
and resource allocation of them. PSU stocks have greater political risk.
3.
Price Risk:
The
FFO will open on 18 January and closes on 20 January 2017 for non-anchor
investors. The price for new investors will be based (after 5% discount) on the
average price of CPSE ETF during the three days offer period (that is, 18-20
January 2017).
The
Reliance Nippon Mutual Fund has indicated the new units of the current offer
are likely to be listed on NSE and BSE by 10 February 2017. The new investors
in FFO of CPSE ETF will have to bear price risk between the investment date and
FFO allotment date for about 20 days.
In
between, we've Union Budget on 1st of February, which is expected to give some
surprises for stock markets. The NAV of the CPSE ETF is likely to be impacted
by this event.
4.
Past Performance:
Government
of India seems to have timed the FFO of CPSE ETF very well. The last one-year
return of the CPSE ETF is 32% as compared to 14% for the Birla Sun Life Nifty
ETF fund. This performance has to be seen in the context of minus 20% delivered
by this CPSE ETF in one year prior to that. As PSU stocks were beaten down
during Jan2015-Jan2016 period, the return of the CPSE ETF looks superior in the
last one year. But when you look at the last two years performance, the extra
return of the CPSE ETF is not much.
CPSE ETF
|
Birla SunLife Nifty ETF
|
|
From
17Jan2016 to 17Jan2017
|
32%
|
14%
|
From
17Jan2015 to 17Jan2016
|
- 20%
|
- 11%
|
From
17Jan2015 to 17Jan2017
|
5.6%
|
1.5%
|
To
use a cliche, past performance of a mutual fund is no guarantee of future
performance. It's a different matter whether the current offer will be suitable
for new investors.
5.
Any Alternatives to this CPSE ETF?
Two
mutual funds are available that invest in PSU stocks--they are Invesco India
PSU Equity fund and SBI PSU fund. They hold around 20 PSU stocks in their
portfolios, with about 50% exposure to natural resources sector. Even these two
funds cannot be called as diversified funds.
To
Sum Up:
Investments
in equities have to be made based on one's risk appetite, one's asset
allocation, long term orientation, future expected performance of the fund (a
basket of stocks underlying the CPSE ETF), and diversification potential of the
underlying stocks in the ETF. Due to the above reasons, the FFO of CPSE ETF may
not be suitable to most of the investors.
As
buying the underlying stocks by large institutional investors involves high
impact cost, such large investors, like, EPFO, LIC of India and other insurers
may be tempted to invest in this ETF.
The
managers to the offer are marketing the FFO of the CPSE exchange traded fund
with the following reasons: there is a 5% discount to investors; the ETF is
eligible for Rajiv Gandhi Equity Savings Scheme; invests in ten so-called "Maharatna"
and "Navratna" companies; the ETF is outperforming Nifty 50 index;
low expense ratio of 0.065%; and 4% dividend yield of the CPSE Index.
All
these reasons do not outweigh the risks involved in the CPSE ETF, like, high
concentration risk, perceived mismanagement and unnecessary interference by the
government and high exposure to natural resources stocks.
If
one is positive about the future performance of the underlying stocks, one
might take a small exposure to the further fund offer of the CPSE ETF. Before
you take a decision on investing, you better read the following web links:
Read
More:
Abbreviations:
EPFO
- Employees Provident Fund Organisation
BSE
- Bombay Stock Exchange
NSE
- National Stock Exchange
Disclosure: Don’t own any units in the above ETF.
But I own a few shares in a few PSUs.
Disclaimer: The brief analysis provided here is
only for information purposes and should not be construed as investment advice.
Investors should consult their own financial advisers before making any
investments. The author is a CFA Charterholder with a vested interest in
financial markets. He blogs at:
