UTI FLEXI CAP FUND - JUNE 2021

UTI FLEXI CAP FUND RELATED QUESTION AND ANSWER FREQUENTLY ASKED

Question No. 1. What are Flexi Cap Funds?

Answer. Flexi-cap Funds have the flexibility to invest across the market capitalization spectrum Vis., Large cap, Mid cap and Small cap stocks. Flexi-cap Funds could be considered for building one’s core equity portfolio. UTI Flexi Cap Fund is a flexi-cap fund which follows growth style of investing.

Fund Snapshot
Launch Date	18th May, 1992
Benchmark Index	Nifty 500
Month End AUM	Rs. 18,405 Crores
Fund Manager	Mr. Ajay Tyagi
Market cap biasness	Agnostic to Market Cap
Investment Style	Growth
Stock picking approach	Bottom-up
No. of Holdings	53
Data as of May 31, 2021

 

Question No. 2. What are Growth Funds?

 

Answer. A growth fund predominantly invests in companies with above-average growth compared to their own industry or the economy in general. These companies endeavor to compound wealth by reinvestment of their cash flows for future growth which could be either organic or inorganic. Growth funds may own stocks that are seemingly expensive but the continual compounding in their intrinsic value justifies the valuation premium. While UTI Flexi Cap Fund is a growth fund it looks at investing into quality along with growth.

Question No. 3. What approach does the fund follow for stock selection?

Answer. There are broadly two methods of stock selection - Bottom-up or Top-down approach. UTI Flexi Cap Fund follows Bottom-up approach for stock selection which means focusing on factors related to the business viz., demand, pricing power, substitutes etc., rather than focusing on macro economic factors.

 

Question No. 4. What is the investment philosophy followed in UTI Flexi Cap Fund?

 

Answer. The Fund follows a well defined investment philosophy in respect of stock selection and framework for prudent portfolio construction. The Fund’s investment philosophy is built around three key pillars namely, “Quality, Growth & Valuation”.

i.                     “Quality” signifies the ability of a business to sustain high Return on Capital Employed (RoCE) or Return on Assets (RoA) over a long period of time. Truly high quality businesses are those that are able to generate high RoCEs and/or RoAs even during difficult times for their industry or sector and therefore operate above their cost of capital at all times. More often than not, a business with high RoCE/ RoA shall be able to generate strong cashflows and these strong cash flows become the source of economic value creation.

ii.                    “Growth” on the other hand signifies long term secular growth for the business. The fund emphasizes on businesses that have steady and predictable growth trajectory rather than cyclical and volatile growth. Cyclical growth can be highly unpredictable and can surprise investors in either direction, as against secular growth where there is relatively more certainty in understanding the long term drivers and hence future outcomes. While high quality businesses create economic value, a high growth business enables compounding of this economic value. It is for this reason that the fund’s favorite hunting ground for stock selection is the intersection of quality and growth.

iii.                  The last pillar of the fund’s investment philosophy is “Valuations”. Valuations are very important as an entry point into a great business and, therefore, one should very carefully study this before buying a stock. Although a Price to Earnings (P/E) multiple is a good starting point for understanding the valuations of a business but it is also a widely misunderstood and abused valuation technique. More often than not a high RoCE and high growth business would deserve a high P/E and would still be an attractive investment for long-term investors who invest on the basis of business fundamentals rather than on the basis of what would outperform in the next few months or quarters. Therefore, before reaching to a judgement by looking at P/Es optically one has to carefully study the characteristics of each business and then establish the fair valuation band for each of them.

 

 

Question No. 5. What is the portfolio composition of UTI Flexi Cap Fund?

Answer. The Portfolio composition of UTI Flexi Cap Fund is based on –

 

 

 Active Share

Active share is defined as the fraction of a portfolio or fund that is invested differently than its benchmark’s constituents. Portfolio which is deployed in the same way as the benchmark would have “Nil” active share. For example, an active share of 80% implies that 20% of the portfolio capital was invested in a similar way as the index. As of May 31, 2021, UTI Flexi Cap Fund has an active share of about 67%, indicating the fund’s high conviction in following its bottomup philosophy rather than following the benchmark. A high active share means higher active calls taken by the fund manager, and therefore the Fund’s returns could vary by a wider margin as compared to the Benchmark’s returns.

Question No. 6. P/E ratio of UTI Flexi Cap Fund seems to be way high, is there still Enough room for return generation from current P/E levels?

 

Answer. The deconstruct of P/E multiple would conclude that P/E multiple is a function of Return on Equity (RoE) and growth that the business is able to deliver. If business is able to deliver high growth at healthy RoE, then business would naturally trade at high multiples. Thus, there is a fundamental reason for quality businesses that grow faster than industry to trade at high P/E multiple.

Growth is an important driver of creating future value in a business provided it comes at high profitability. Since the fund’s focus is on businesses which are both profitable as well as high growth, the businesses that are part of the portfolio to are expected to create significant value over the years regardless of what happens to their stock prices in the short-term. P/E ratio is able to capture the earnings of a business only over the next one year or at the most next two years. High growth business that can grow profitably for years to come may look expensive on a PE basis but because of their longevity of growth and future value creation potential they could still be cheap compared to their intrinsic value.

Finally, robust economic characteristics also get reflected in the high Free cash flow that businesses generate. Free Cash Flow is a better way to capture the value generated by a business compared to looking at their earnings only. While price earnings multiple of the fund may seem to be expensive as compared to benchmark in the recent past, on price to Free cash flow multiple the fund, it is almost same as the Benchmark.

 

Question No. 7.  How has UTI Flexi Cap Fund performed during market draw downs?

Answer. Analysis of observations when Nifty 500 corrected >20% over the last decade

 

 

 

Date From	Date To	UTI Flexi Cap Fund – Growth	Nifty 500 TRI Returns	Outperformance
16-Oct-07	17-Mar-08	-17.48	- 21.17	3.69
17-Mar-08	27-Oct-08	-33.75	-45.26	11.51
09-Nov-10	20-Dec-11	-20.83	-28.42	7.59
17-Jan-20	23-Mar-20	-31.63	-38.11	6.48

 

Fund’s NAV fell less than the fall in benchmark index Nifty 500, generating Alpha on all these occasions

 

Question No. 8. What are the average holdings among the market caps (Large, Mid and Small) of the fund for last 24 months?

Answer. Average holding for last 24 Months – Large – 65% | Mid – 27% | Small – 8%

 

 

 

Question No. 9. What is portfolio turnover ratio? What is the annual portfolio turnover ratio of the fund?

Answer. Portfolio Turnover Ratio represents the churn in the underlying stocks or the percentage of the portfolio holdings that have changed over a time period. The strategy followed by the fund is very strict in selecting businesses with high quality and a long runway for growth. The annual portfolio turnover of the fund is usually between 10% to 15%, which determines the conviction of the fund in holding on to its portfolio through the long term with out churning the portfolio often.

Question No. 10. What are top 5 active stock bets over last 12 months in the portfolio?

A.     Overweight Top 5

Security Name	Average Weight (%)	Active Weight (%)
Bajaj Finance Ltd.	6.25	4.85
Larsen & Toubro Infotech Ltd.	4.60	4.42
Astral Ltd.	3.12	3.00
Info Edge India Ltd.	3.04	2.67
AU Small Finance Bank	2.40	2.19

Average Weight and Active Weight is average of last 12 months

B.   Underweight Top 5

Security Name	Average Weight (%)	Active Weight (%)
Reliance Industries Ltd.	-	8.28
ICICI Bank Limited	-	4.06
Hindustan Unilever Limited	-	2.52
ITC Limited	-	2.23
Larsen & Toubro Ltd.	-	1.77

Average Weight and Active Weight is average of last 12 months

Data period – 31 May 2020 to 31 May 2021

 

Active stock weight refers to the Overweight and Underweight stocks within the portfolio as compared to the benchmark.

 

Question No. 11. Key detractors and contributors to the performance for the previous trailing year for the fund –

 

Answer. Key detractors and contributors for the fund’s performance are

Stocks	Detractors	Contributors
Stocks	1. ICICI Bank Ltd.	1. Bajaj Finance Ltd.
	2. Shree Cement Ltd.	2. Astral Ltd.
	3. SBI Ltd.	3. Larsen & Toubro Infotech Ltd
	4. Ajanta Pharma Ltd.	4. Hindustan Unilever Ltd.
	5. Torrent Pharma. Ltd.	5. ITC Ltd..

 

Sector	Detractors	Contributors
Sector	1.  Pharma	1. Consumer Goods
	2. Utilities	2. Financial Services
	3. Chemicals	3. IT
	4. Textiles	4. Oil & Gas.
	5. Cement	5. consumer Services

Data period – 31 May 2020 to 31 May 2021

 

 

Question No.  12. Why invest in UTI Flexi Cap Fund?

Answer. A. Prudent & Strong Portfolio of Quality Businesses: The Fund consists of high quality businesses that have an ability to show strong growth for a long period of time

i. “Quality” companies expected to perform across market cycles

ii. “Quality” companies may mitigate draw down

 iii. “Quality” companies likely to rebound faster based on the strong fundamentals of balance sheets & business models iv.“Quality” companies are across market caps and are not restricted only to large caps

B. Focused and Disciplined: Building portfolio around such high quality businesses that are expected to show secular long term growth and are not cyclical in nature

C. Long Term Wealth Creation: By investing only into companies that may generate economic value

UTI Flexi Cap Fund (An open ended equity scheme investing across large cap, mid cap, small cap stocks) This product is suitable for investors who are seeking*:

 • Long term capital appreciation

 • Investment in equity instruments of companies with good growth prospects across the market capitalization spectrum

 Investors should consult their Mutual Fund Distributor if in doubt about whether the product is suitable for them