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WF: You have been planning for the launch of the second tranche of CPSE ETF. Have the details been finalized yet? How has been the experience of the investors so far?
Himanshu: Yes. The Terms of Reference have been finalized. Accordingly, the Further Fund Offer (FFO) of the Central Public Sector Enterprises ETF (CPSE ETF) would be from 17th to 20th Jan. The issue size will be Rs. 4500 Crs, with a green shoe option to retain an additional Rs. 1500 Crs, making the potential size of the issue to be Rs. 6000 Crs. There will be an upfront discount of 5% for all categories of investors.
The first tranche of the CPSE ETF, launched in March 2014, generated tremendous amount of interest. Against the issue size of Rs. 3000 Crs, it was oversubscribed, with subscriptions totaling over Rs. 4300 Crs from across various categories of investors - Anchor Investors, QIBs, retail and high networth individuals.
The CPSE ETF has outperformed the overall markets, generating an annualized return of 15.15% as compared to 12.09% generated by Nifty 50 Total Return (TR) Index, since inception. In the last 1 year, the index has returned 18.78% vs 5.04% of Nifty (all returns as of 30th Dec 2016).
WF: What would you say is the key investment argument for the second tranche of the CPSE ETF?
Himanshu: The CPSE ETF gives investors a unique opportunity to invest in a basket of diversified PSU stocks at a low cost, with all the benefits of ETFs. Distributors should recommend an allocation to this fund to their investors as a case for adding potential alpha, with benefits of diversification. The Fund is also RGESS-compliant.
The CPSE Index consists of 10 PSU stocks considered from a Universe of Maharatnas and Navratnas. Only those companies that have paid dividend of not less than four per cent for seven out of the last nine years have been considered for the index. The stocks can be broadly categorized into four diversified broad themes - Energy (Upstream oil companies), Oil PSUs (OMCs), Infra & Engineering Companies and Power Finance Companies.
Government is focusing on making PSUs financially healthy and efficient. Oil sector has been practically liberalized and other sectors such as fertilizers, energy and power are also on the verge of sustained liberalization. In the recent past, oil prices have improved from the lows witnessed in the beginning of the year, helping the Energy companies. The reforms undertaken by the Government such as deregulation of diesel prices and UDAY have helped Oil PSU and Power Finance Companies, while the Government's emphasis on developing infrastructure has helped the infra companies in the index, effectively resulting in the superior fund performance.
The underlying PSU stocks in the ETF have a relatively lower P/E ratio (PE Ratio of Nifty CPSE Index is 11.44 vs Nifty 50 PE of 21.93), have historically offered higher dividend yields (Dividend Yield of Nifty CPSE Index is 4.07 vs Nifty's 1.35) and are available at attractive valuations.
The fundamentals of the underlying stocks, and technicals in terms of attractive valuation metrics make for a strong investment case.
WF: Why do you believe this is a great opportunity for IFAs to expand their customer base?
Himanshu: We expect a natural pull for the proposition. The fundamental investment opportunity as I had mentioned earlier, the strong track record of the fund, along with our high-intensity marketing efforts should generate significant investor interest for the product.
We believe this is a good opportunity for IFAs to reach out to their existing clients to offer this proposition as an efficient means to add a flavor of diversified PSU stocks, having the potential to add alpha, to their portfolio. It is also an excellent opportunity to take advantage of the buzz and reach out to new clients to expand their customer base.
Apart from Retail and HNI investors, we expect good amount of interest from Institutional investors such as Insurance Companies, Provident Funds, Pension Funds, Superannuation Funds and Gratuity Funds. The Fund meets IRDA's investment criterion with respect to dividends and is also an approved investment for retirement funds.
WF: How can IFAs go about fulfilling the requirement for their clients?
Himanshu: The process for applying in the CPSE ETF FFO is same as that of applying in a normal open-ended mutual fund scheme. Applications can be submitted in physical form at designated ISCs (RMF & Karvy branches). Additionally, investors can also apply online through various modes such as NSE-MFSS, BSE Star MF, NMF-2, MF Utility and RMF website. Transaction charges would not be applicable for exchange platform.
WF: Does it make sense for IFAs to target demat account holders and offer this ETF as an alternative to all the small and marginal holdings that often clutter investor portfolios?
Himanshu: Most certainly. The CPSE ETF offers fair bit of diversification within the PSU theme. The 10 stocks are from across different investment themes. Investors get to invest into ONGC, Coal India and Oil India, which are Energy stocks, IOC and GAIL which would be beneficiaries of oil sector reform, Container Corp, BEL, Engineers India which are into Infra & Engineering and PSU Financials, PFC and REC. Hence, IFAs could advise their investors to consolidate their holdings, and add a diversified flavour of PSUs in their portfolio.
WF: Does an exit from this ETF have to be only by sale in the stock market? Is a demat account and an account with a stock broker therefore mandatory?
Himanshu: Demat account is compulsory to subscribe to any ETF. The units allotted in the FFO will be credited in the investors demat account, and will get listed on the stock exchanges. Subsequently, investors could trade in the ETF through the stock exchanges, just like how they would do any other stock. Investors could also transact with AMC directly for purchase / redemption. However, that would have to be in creation unit size and multiples. The creation unit size for the CPSE ETF is 1 Lakh Units, which translates to approximately Rs. 26 Lakh now. For the FFO, the minimum investment amount for retail investors is only Rs. 5000.
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