Will the tide turn for PSU funds?

If the Indian economy is doing well, shares of government companies should do well, right? Wrong. If you look at the returns of thematic Public Sector Undertaking (PSU) funds or PSU shares in the last year, you will be disappointed.

Despite having government backing and primed to enjoy potential gains from a strong economy, PSU funds have not done that well recently. But, that could be an opportunity.

According to fund managers and experts PSU funds, which are over invested in energy stocks, have not done well due to boiling crude rates. Plus, PSU banks have their own share of bad loan problems. So, investors should remain patient. PSU funds will start performing once the economy starts growing, said the experts that DNA Money spoke to. Read on to know more.

The universe of PSU stocks is quite big with different sets of companies available. As of August 31, 2018, of the total of 331 Central Public Sector Enterprises (CPSEs) and subsidiaries of CPSEs, only 59 are listed. Fifty-six of these are listed on BSE, which constituted 7% of the total market capitalisation of 4,659 companies listed on BSE. In addition, 25 Public Sector Banks (PSBs) with their subsidiaries and five State Level Public Enterprises (SLPEs), accounted for another 1% of the total market capitalisation at BSE. Thus, all PSUs together constituted 7.3% of the total market capitalisation at BSE or Rs 11.63 lakh crore.

Performance and outlook of PSU funds/stocks

There are three thematic PSU funds in the MF market. The Rs 4,344-crore CPSE Exchange Traded Fund that is managed by Reliance MF, the Rs 181-crore SBI PSU Fund and the Rs 69-crore Invesco India PSU Equity Fund. Over the last one-year period, returns from PSU funds have not been good, at a time when the Sensex/Nifty has delivered double-digit returns. In the last one year period returns from these funds have been negative, between -4.5 to -16%. This makes the category the worst performing in equity funds. There are valid reasons why this has happened.

Pranav Gokhale, fund manager, Invesco Mutual Fund said: "PSUs funds invest in PSU stocks which are largely cyclical in nature. The energy sector (30% of BSE PSU index) has been challenged due to a surge in crude prices, while the other larger set of the PSU index (38% of BSE PSU index) comprising PSU banks are currently going through a business reset. This has led to the muted performance of PSU stocks as compared to the broader market."

With large bets on PSU firms involved in oil, petroleum products, and finance/banking, PSU funds have seen a sluggish performance. This could change soon. PSU funds can be great turnaround stories when the tide turns, agreed Renu Pothen, research head at fundsupermart.com.

She is of the view that sectors included in PSU funds will start performing once the economy starts growing. These sectors are subject to policy changes as the majority holding is with the government, and this could lead to volatility in the funds. "The volatility in oil prices and the on-going crisis in the banking system on account of huge NPAs will continue to impact sectors in this space. We continue to believe that one of the key agendas of the Modi Government has been to enhance the efficiency of PSUs and make them globally competitive; this adds to our confidence in holding these funds," said Pothen.

The longer-term outlook on PSUs remains good. "PSU companies are well positioned to benefit from Government led capex in defense, road, railways, transmission, and distribution. We believe that valuations are currently attractive for PSU stocks considering their longer-term growth," pointed out Gokhale of Invesco MF.

Strategy for retail investors

PSU funds have a reasonably long track-record. However, being thematic products, they are prone to periods of ups as well as downs. As a thumb rule, retail investors should not be very aggressive on PSU funds. Themes take time to play out, and that can require patience. For instance, on Monday evening the government announced a proposal to merge Bank of Baroda, Vijaya Bank, and Dena Bank. The stock impact shows Dena will be a winner probably at the cost of Baroda.

So, should you consider PSU equity funds? What should be the time horizon? Pothen, whose firm has come out with a nearly 40-strong list of recommended equity funds for 2018-19, does not have a PSU equity fund. She has a reason. "This category is strictly advisable only for aggressive investors who have a time horizon of more than five years. The PSU theme is a long-term story; since these funds are subject to volatility due to policy changes, depending on who is at the helm in North Block, as well as external factors like commodity prices, patience is a virtue these investors should have if they are buying into these funds," Pothen said.

Even if we continue to have policies that focus on changing the fortunes of these organisations, doing so will take time. PSUs are mammoth organisations that have been run in a certain way for ages, and improving their efficiency at all levels - whether it is people or process - will need sustained effort over time. "Volatility will be the norm of such a fund and hence interested investors should not be the type to get rattled by this," she added.

PSU fund size

Rs 4,344 crore CPSE ETF managed by Reliance MF

Rs 191 crore SBI PSU Fund

Rs 69 crore Invesco PSU Equity Fund

Future Outlook

• PSU funds will start performing once the economy starts growing 
• PSUs stand to gain from government led capex in defense, road, railways, transmission, distribution. 
• PSU theme is a long-term story; since these funds are subject to volatility due to policy changes, depending on who forms the government, and global commodity prices