Mastershare 1986: Hold

Recommendation: Hold

Aarati Krishnan

MASTERSHARE 1986, the close-end growth scheme from the UTI, currently trades at a 20 per cent discount in the secondary market.

The scheme is due for redemption in October 2003. Investors in the fund can, therefore, hold on to their investments. Under normal circumstances, investors could use the discount in the secondary market to enter the fund. However, this does not appear to be advisable in the case of Mastershare because of a few factors:

*One, the latest portfolio of the fund is unavailable (June 2001 is the latest month for which the scheme declared its portfolio), which makes it difficult to gauge its prospects.

*Two, Mastershare is among the largest schemes in the UTI basket. Several of the large UTI schemes have been transformed due to inter-scheme transfers from US-64. Until Mastershare declares its annual accounts for December 2001, it would be difficult to say what shape its portfolio has taken over the past few months.

*Three, viewed purely on its performance, the scheme appears an unattractive investment option. The scheme underperformed the Sensex in four of the past five years.

Over the past couple of years, the portfolio appears to have come a full circle. The following features emerge from a study of the portfolio over the past year:

*The scheme, initially invested in cyclicals, was restructured to include a host of PSUs in the years from 1995 to 1997. Thereafter, the fund went through another round of restructuring in which it enhanced weightage to technology, FMCG and other growth stocks.

*Over the past few months, however, the fund appears to have retraced its steps, enhancing its weightage to cyclicals while stepping down exposure to technology stocks.

*In the process, the fund also appears to have reduced exposure to stocks of a slightly risky genre, such as Himachal Futuristic and Global Telesystems. These exited the top holdings, to be replaced by the oil PSUs and some FMCG stocks.

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*Between October 2000 and June 2001, the fund toned down its exposure to technology and related sectors from around 30 per cent to less than 19 per cent. In contrast, the exposure to cyclicals (oil, refineries, cement, steel), climbed from 43 to 53 per cent.

*However, the fund has not significantly altered its stance on FMCG stocks. In fact, such stocks have consistently accounted for between 22 and 28 per cent of the assets. HLL and ITC account for the bulk of this allocation, making up 18-22 per cent of the net assets between October 2000 and June 2001.

*One significant feature of Mastershare's portfolio over the past few years was that the degree of concentration of the top holdings has increased. The top 15 holdings, which accounted for 62 per cent of assets in October 2000, accounted for 69 per cent by June 2001.

*Despite this, the portfolio continues to feature a large number of marginal holdings, accounting for less than 1 per cent each in the net assets. In June 2001, for instance, the fund had 140 stocks which each accounted for less than 1 per cent of the net assets. Several stocks of doubtful quality figure in this set -- HEG, Herdillia Chemicals, Mahavir Spinning and Neyveli Lignite being instances. These still account for a significant portion of the net assets and could prove to be a drag on performance.

*Given the large size of the fund, high concentration in the top holdings could work against performance. With net assets of around Rs 1,200 crore under management as of June 2001, the fund may find it difficult to transact on its top few holdings without impacting stock prices.

*By end of June 2001 the fund was overweight in FMCG stocks, while having a very small exposure to pharma stocks. If the fund retained the same sectoral composition in the subsequent months, it is likely to have missed the sharp run-up in pharma stocks.

Mastershare was launched as a close-end growth scheme in 1986. While several other close-end schemes of the UTI have recently gone open-ended, this scheme remains close-end. The fund is due for redemption in October 2003. The units are traded in the secondary market. The units now trade at a discount of around 20 per cent to the prevailing NAV. The level of discount appears to have narrowed over the past two years from around 30 per cent to 20 per cent.