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.