'An opportunity to own jewels of corporate India that seek to provide growth, stability and create long term wealth' - this is the new tag line of ICICI Prudential Mutual Fund, the largest fund house in the industry. The Government of India (GOI) has partnered with the veteran fund house, to launch the Bharat 22 Exchange Traded Fund (ETF) comprising Central Public Sector Enterprises (CPSEs), Public Sector Banks (PSBs) and strategic holding of Specified Undertaking of Unit Trust of India (SUUTI). The GOI has also decided that the ETF will be subject to annual rebalancing unlike the other ETFs that only track a particular index passively. The government has ensured that, along with the big names in the CPSE space like ONGC, Coal India, GAIL, NTPC, etc., a few favourites of the bulls of Dalal Street also find a place in the portfolio. Some of them include State Bank of India (SBI), Bank of Baroda (BOB), Axis Bank, ITC and L&T, which are now common names among retail investors discussing investments in the equity markets. This is also a contrast from the previous CPSE ETFs launched by GOI, which contained only a few selected CPSEs.
At a press meet held by ICICI Prudential Mutual Fund to launch the Bharat 22 ETF, Anuradha Thakur, Joint Secretary of Department of Investment and Public Asset Management (DIPAM), Ministry of Finance said, "Bharat 22 aims at bringing broad-based ownership pattern to the public sector enterprises. Disinvestment programme now forms the core of government's investment strategy which is all about better management, more efficient governance, transparency and accountability. The ETF is well diversified with investments across six core sectors and offers good investment opportunity and expect an overwhelming response to this NFO".
What are the features of the Portfolio?
Bharat 22 ETF is a carefully packaged portfolio comprising 22 companies across six major sectors. Each stock in the index has a weightage of not more than 15%, while each specific sector has been capped at 20%. The annual rebalancing planned in March every year will ensure that the ETF constituents follow the company and sectoral caps religiously. This is pre-dominantly a large cap biased ETF with a meagre exposure into companies belonging to the S&P BSE MidCap Index and including names like NBCC (India) Ltd, NLC India Ltd, SJVN Ltd and Indian Bank.
Constituents of Bharat 22 ETF
Our observations are as follows:
As of end September 2017, L&T has the maximum weightage in the portfolio at 16.92% followed by ITC and Axis Bank, whose exposures in the portfolio are at 14.26% and 7.82% respectively. In an ETF designed to meet the disinvestment target of GOI, this is the first time that maximum exposure has been taken into their strategic holdings and not companies belonging to the CPSE category alone.
The three stocks mentioned above constitute 39% of the overall portfolio, while the top 5 stocks occupy more than 50% of the portfolio.
The top three sectoral allocations are Industrials, Utilities and Energy. This indicates that these sectors are on the GOI's priority for transforming the economy.
The other three sectors like Finance, FMCG and Basic Materials are also focus areas.
From a valuation point of view, S&P BSE Bharat 22 Index is more attractive as compared to the major indices such as the S&P BSE SENSEX, NIFTY 50, S&P BSE 100 Index and S&P BSE 200 Index.
Consider the following facts for evaluating the fund:
ICICI Prudential Mutual Fund's existing exposure into the 22 stocks is an enormous INR 25,377 crore as on October end 2017. This indicates that the fund house decided to put its money where its mouth is when it constructed the portfolio along with North Block.
We also assessed the similarity of this portfolio against our recommended large cap and multi-cap funds from the ICICI Prudential stable and the results are as follows:
Bharat 22 ETF Stocks Exposure in iFAST Recommended Large & Multi Cap Funds from ICICI Prudential MF
If an investor had parked a surplus of INR 10,000 into S&P BSE Bharat 22 Index and S&P BSE Sensex on November 14, 2007, then the current surplus would have been INR 19,540 and INR 16,576 respectively as on November 13, 2017.
Why do we recommend Bharat 22 ETF?
If you believe that India's growth story will create long term wealth, then Bharat 22 ETF should be a part of your portfolio. A typical large cap biased ETF is an ideal recommendation for all risk profiles from conservative to aggressive; however, we caution that this ETF is ideal for investors having a risk profile leaning from balanced to aggressive. The large exposure into two major stocks can tilt the fortunes of this ETF in either direction. Hence, this portfolio is best suited for investors who are not worried about the frequent roller coaster rides of the market. The biggest USP of this ETF is not just the discount offer of 3% along with a very low expense ratio of 1 bps, but the fact that GOI is disinvesting its stake in some of the best companies, which in turn will create wealth for our investors in the long term.
In an earlier article, we had commented that we recommend funds whose focus areas are in line with North block. This is one such ETF from the GOI with sectors where maximum reform measures are announced. It is suitable for all those investors who believe that we have a reform oriented government working towards getting the economy back into the growth trajectory soon. Though some of the reforms are causing short term hitches in the economy, we believe that "There is no such thing as a free lunch". Therefore, if you are considering investing into this ETF, stay put for more than five years and let the fund management team rebalance the portfolio, which will help you reap the benefits in the long term.
Details of Bharat 22 ETF