Investing in a
concentrated ETF
(This was published in the Deccan Chronicle/Asian Age , recently)
The erstwhile Unit Trust of India
(UTI) was used as a parking lot for many things. From denying a genuine promoter his stake or
protecting a bunch of self appointed custodians from hostile takeovers, UTI was
a convenient vehicle. Finally when UTI was wound up, some shares were
transferred to a special vehicle with the acronym “SUUTI” and funded by the
GOI. The shares are in companies like ITC, L&T and Axis Bank.
Surely there are vested interests
which prevent the GOI from getting best value. For example, ITC shares should
be first offered to BAT, the original promoter. They would offer the best
price. However, there are vested interests which do not want this to happen.
Similarly, stakes in L&T or Axis Bank will realise better money if sold in
an auction to someone who can get hold of the company.
So, now the wise investment
bankers have found a way to address the issue. The GOI will get lesser money
and no one will be able to control the blocks held in SUUTI. All the holdings
will be pooled together in to a “ETF” or a special vehicle which will hold only
these shares. These will become like a permanently closed ended fund, with
units on offer for sale and for subsequent listing and trading. This will get
some money to the GOI and the Trust that holds these shares will surely serve
the vested interests.
Leaving aside the politics, let
us examine the merits of this ETF as an investment opportunity.
For those who do not have the
inclination or time to invest directly in equities, this is a great
opportunity, should it materialise. The shares of the three companies would be
bundled in to a package, units issued on those at a price. There would be a
fixed no of shares of each company in one unit (or parts of shares of each company). The unit price would reflect the prices of
the components in the market place. It would technically be an Equity product,
with all the tax advantages that go with it.
Let us assume that there would be
one share each of ITC, L&T and Axis Bank that go to make up one unit. In
other terms if the prices of these three shares are Rs. 350, Rs.1450 and Rs
400/- respectively. The value of one unit would be Rs.2200. It is possible that
the GOI may decide that each unit will have one tenth of a share of each of the
three companies. In which case, at the above prices, the NAV of each unit would
be Rs.220/-. Depending on price
movements in each of the underlying shares, the NAV would fluctuate.
Each unit gives the owner an
exposure to three distinct companies with one common thread. All three are
driven by employee directors and not by promoters. ITC has two businesses- Vice and FMCG- Both
are reasonably recession proof. L&T has history plus some major interest in
finance- Average returns but strong liking with the investor community and Axis
Bank is among the rising stars in banking. It is unlikely (not impossible
though) that all three stocks will go bad at the same time. Going by past
performance, these three stocks have beaten the indices very comfortably. If
you owned these three stocks over the last ten years, you would have done
extremely well.
Well, the past is great. My view is that these three companies are
well positioned for the future also. There is also the possibility (remote?)
that L&T and Axis Bank could get taken over in the not to distant
future. L&T and ITC have several
businesses that may be spun off and bring value. Maybe one day the FMCG
business of ITC will stop pulling down the ROE of the vice business. So there
are upside possibilities on the stocks.
So, should such an offering (an
ETF of these three stocks) hit the market, I would recommend a ten to twenty
percent allocation of your equity money in. And since this would be traded on
the exchanges, a SIP should be also a good option. And once listed, traders
will also smell arbitrage opportunities if there is a mismatch in the ETF price
as compared to the prices of the underlying. This is unlikely, but not
impossible.
I would recommend this product to
those who always wanted to buy direct equity, but did not do so for want of
time or effort. I would expect these three stocks to deliver returns superior
to the index itself.
