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The Economic Times

PSU funds may be a better bet than public sector ETF

Investors may be better off investing in existing Public Sector Undertaking or PSU funds than the Central Public Sector Enterprises (CPSE) Exchange Traded Fund (ETF) launched by the government on two counts.

The fund’s high concentration on th e energy sector, whose finances are impacted because of subsidies and the resultant volatility in earnings besides the passive nature of the ETF could weight it down. The CPSE Index has close to 60% of a sector weightage to energy, which makes the ETF vulnerable to the earnings prospects of the energy sector, which is regulated by the government.

The ETF portfolio will have a 26% weightage for ONGC, 18% for GAIL and 7% for Oil India. The cumulative contribution of these companies to fund under-recoveries has varied between 20% and 45% in the past five years, which implies huge volatility in earnings. In FY14, total under-recoveries or the burden of selling products below cost is projected to be Rs 1.41 lakh crore, and of this, nearly Rs 64,500 crore will be absorbed by ONGC, GAIL and Oil India.

“CPSE ETF has a 60% weightage for the energy sector, which is highly dependent on government policy when it comes to the oil subsidy burden. The earnings of upstream and downstream companies had been relegated to whims and fancies of government contribution.

So, the performance of the CPSE ETF will largely be driven by the performance of ONGC with a weight of 26% with the earnings picture quite hazy, given that there is no clarity on upstream contribution and quantum of gas price hike to be retained by the company,” said the head of research of a leading domestic brokerage house. While investing in the PSU index, fund managers can shift the portfolio, but in the CPSE ETF, the portfolio cannot be churned for at least a year.

As opposed to the ETF, which is passive and just mirrors the CPSE index, PSU funds are actively managed by fund managers and offer a diversified exposure to PSU stocks across sectors. There are four PSU funds, which even though have underperformed the broader index — the Nifty, in the past one year, have outperformed their benchmark index — the BSE PSU Index. These are SBI PSU, Baroda Pioneer PSU, Sundaram PSU Opportunities and Religare Invesco PSU Equity.

Among these funds, Religare Invesco PSU has been an outperformer with the slide being lower than its benchmark. The fund has given returns of -5.4 against a fall of -11.2% for the S&P BSE PSU index.

Though the companies in the ETF have a consistent dividend-paying record, investors must note that the ETF offers limited diversification in terms of tapping into potential PSUs across sectors as it merely mirrors the CPSE Index.
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