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In a bull market, a rising tide lifts all boats. The CPSE Exchange Traded Fund (managed by Nippon India Mutual Fund) has been one such instance. With PSU stocks catching the market’s fancy, this ETF has seen its NAV more than double from ₹47 a year ago to over ₹102.8 now (August 21, 2024). This may be a good time for investors to book profits on this ETF and move to a more broad-based index fund or cash/debt, depending on their risk profile.
There are four reasons why we think it is best to exit this fund and lock into gains now.
Long-term record
Thanks to the stellar outperformance of PSU stocks in the last three years, the trailing returns of the CPSE ETF look attractive today, with one-year returns at 117 per cent, three-year at 60 per cent and five-year at 35 per cent, all ahead of the Nifty50. But the CPSE ETF’s performance has perked up only recently. If you took stock in August 2022, the five-year return on the CPSE ETF, at 6 per cent, was well below the Nifty50 return of 11 per cent. A rolling return analysis of the CPSE ETF since inception pegs its average rolling three- and five-year return at 8.8 per cent and 7.3 per cent, respectively. The fund’s history suggests that timely entry and exit are key to locking into good gains from it. This seems to be a good time to exit, given the outperformance over the last couple of years.
No coherent theme
Thematic funds deliver good results if there is a uniform set of drivers for the companies making up the theme — such as shifting consumer preference, favourable policy, cyclical upturn etc. But the CPSE ETF is made of a disparate set of companies with their only common thread being majority ownership by the Central government. The drivers for NTPC and NHPC, its power generation holdings, for instance, are bound to be quite different from those for NBCC (construction), ONGC (oil exploration), Bharat Electronics (defence) or Cochin Shipyard (ship-building). Yet all these stocks feature in this 11-stock portfolio.
The fund mirrors the Nifty CPSE Index. This index is run for the express purpose of facilitating the Centre’s PSU disinvestment programme. There is usually no pattern as to why the Centre picks some PSUs over others, when it prepares them for disinvestment. The stocks in the CPSE ETF can also get churned based on the Central Government’s disinvestment plans. In end-2017, the CPSE ETF had ONGC, IOC, Coal India, GAIL, Concor making up 78 per cent of its portfolio. Today, the top holdings are NTPC, PowerGrid, ONGC, Coal India and BEL making up 85 per cent.
Not value
When the two tranches of the CPSE ETF were launched in 2014 and 2017, PSUs were market under-dogs and were thus available at single-digit PEs. Now, however, after a concerted re-rating, many PSUs are no longer value-buys. This has reflected in the CPSE ETF too. Regulated return PSUs such as NTPC and Powergrid have climbed to valuations of 19-20 times, compared to single-digit PEs before. Stocks such as Bharat Electronics, NBCC, Cochin Shipyard and SJVN now trade at pricey PEs of 52-75 times. Sectors that offer pockets of relative value within PSUs such as banks and financial firms, do not feature in the CPSE portfolio.
What’s more, the CPSE ETF portfolio is not diversified in the true sense, with energy and utilities making up 66 per cent of the assets, industrials 18 per cent and other stocks 15 per cent. All companies making up this basket are subject to cyclical earnings, with strong linkages to the economy. After stellar growth over FY24, the economy is likely to see more moderate growth this year, putting the CPSE portfolio at risk of an earnings slowdown.
Alternative routes
Of course, the PSU universe still offers some pockets of attractive opportunity. Some PSUs have reported operational turnarounds in recent years and are high dividend yield candidates. But investors would be better off owning such stocks directly, instead of trying to own their PSU exposures through an ETF over whose composition they have little control.
The CPSE ETF managed assets of ₹46,793 crore by end-July 2024. It had a very reasonable expense ratio of 0.07 per cent.
Why book profits