CPSE ETF Product Note

Transcription

1 CPSE ETF Product Note

2 What are Exchange Traded Funds (ETFs) An ETF is a marketable security that tracks an underlying index, a commodity or bonds. Equity ETFs are simple investment products that combine the flexibility of stock investment and the simplicity of equity mutual funds. They trade on the cash market of stock exchanges, like any other company stock, and can be bought and sold continuously at market prices. Equity ETFs are passive investment instruments based on indices and invest in securities in same proportion as the underlying index. Because of its index mirroring property, there is complete transparency on the holdings of an ETF and investors can obtain the diversification benefits by purchasing as low as a single unit. 35,000 30,000 Growth of ETFs in India Average AUM (INR cr.) 25,000 20,000 15,000 10,000 5, Number of ETFs 0 0 Avg. AUM Number of ETFs *Average AUM for the Quarter. ** Month end AUM. For other periods AUM is Average AUM for the month. Source: SMC Global Research. With the growing awareness among Indian investors, Exchange Traded Funds have emerged as the preferred passive investment vehicle in India. This is evident from the manifold increase in the size and number of ETFs in the country. By the end of November 2016, there were 63 ETFs in the market with a collective size of Rs. 31,118cr, up from 26 ETFs with a size of Rs. 4,981cr in

3 CPSE Index The Nifty CPSE Index has been constructed to provide the Government an additional mechanism to divest some of its stake in Central Public Sector Enterprises (CPSEs) through the ETF route. The index comprises of ten blue-chip Public Sector Enterprises selected on parameters including government holding, dividend payout track record and market capitalisation. The index provides representation to six sectors of the economy. Index Constituents Company s Name Weight (%) Market Cap (INR Cr.) Oil & Natural Gas Corporation Ltd ,168 Coal India Ltd ,923 Indian Oil Corporation Ltd ,931 GAIL (India) Ltd ,879 Power Finance Corporation Ltd ,430 Rural Electrification Corporation Ltd ,037 Container Corporation of India Ltd ,812 Bharat Electronics Ltd ,537 Oil India Ltd ,209 Engineers India Ltd ,866 Sector Representation Sector Weight (%) ENERGY METALS FINANCIAL SERVICES SERVICES 5.20 INDUSTRIAL MANUFACURING 4.58 CONSTRUCTION 2.14 Data as on 30th November, 2016.Source: NSE, SMC Global Research Data as on 30th November, 2016.Source: NSE, SMC Global Research CPSE ETF The CPSE ETF is a fund that has been established to facilitate the Government of India s disinvestment programme, under which it is looking to dilute some of its stake in selected PSUs. The CPSE ETF invests in stocks of the Nifty CPSE Index in the same proportion and weightings of the index thus mirroring the performance of the Nifty CPSE Index. It is just like an open ended Mutual Fund scheme, units of which, however, are listed on both NSE & BSE and can be bought / sold like any other stock at real time prices during market hours. The CPSE ETF s New Fund Offer (NFO) was first launched in March, 2014 with an issue size of Rs. 3,000cr. The NFO had then received an overwhelming response from all categories of investors and was oversubscribed by Rs. 1,363cr. The ETF went live on 4th April, 2014 when its units were listed on both the NSE & BSE. 2

4 The Government of India (GOI) had then provided two alluring sweeteners to investors in the form of a mix of an upfront discount and a back-end loyalty benefit: Upfront Discount: The scheme was entitled to purchase the underlying shares of the Nifty CPSE Index from the GOI at a discount of 5% from the relevant prices. Loyalty Benefit: Initial subscribers who held on to their investment for one year from the date of the allotment were awarded a loyalty bonus in the ratio of 1:15 i.e. 1 unit for every 15 units held. CPSE ETF Scheme Features Nature of Scheme Open Ended Exchange listed Index Linked Scheme Benchmark Nifty CPSE Index Rule of Rule of a minimum of 20 investors and no single investor accounting for more than 25% of the corpus of the scheme does not apply to ETFs Asset Allocation Instruments Minimum Maximum Securities covered by Nifty CPSE Index 95% 100% Money Market Instruments (maturity not 0% 5% exceeding 91 days) Load Structure Entry & Exit Load: Nil Minimum Application Amount (during ongoing offer period) With the Exchange: Buy/Sell minimum 1 (one) unit and in multiples thereof. With the AMC: Authorized Participants and Large Investors allowed to transact in Creation unit Size of 100,000 units. 3

5 Modus Operandi of the CPSE ETF Exhibit 1: During a New Fund Offer (NFO)/ Further Fund Offer (FFO) Exhibit 2: During an Ongoing Offer 4

6 Compelling Investment Proposition : Attractive Valuations: The CPSE Index which gives an exposure to marquee PSU stocks has a modest PE multiple of 11.48x its trailing twelve month earnings. This stands at a relative discount to the other broader indices. Indices P/E P/B NIFTY CPSE 11.48x 2.01x NIFTY x 3.12x NIFTY Next x 3.44x NIFTY x 3.17x th Data as on 30 November, Source: NSE, SMC Global Research. Low Costs: The CPSE ETF charges an annual fee of % of total assets. Actively managed funds with PSU exposures on the other hand charge an expense ratio upwards of 2.25%. This difference in expense ratio can have a significant impact on the ultimate net returns. Steady Dividend Payout: One of the criteria for selecting stocks to be included in the Index was a consistent dividend payout track record. Thus, the steady cash flow from the companies in the form of dividends has contributed to the returns. Indices Dividend Yield (%) NIFTY CPSE 4.02 NIFTY NIFTY Next NIFTY th Data as on 30 November, Source: NSE, SMC Global Research. Liquidity: ETF units are traded on exchanges and can be easily liquidated during trading hours. Authorised Participants/ Large Investors also have the option of approaching the AMC for purchase/redemption of units subject to a minimum transaction size set at 100,000 units. PSU exposure with less stock specific risk: The CPSE ETF allows investors to take exposure to the blue chip PSU companies across different sectors with relatively less stock specific risk as the risk gets diversified among the basket of stocks. Also, majority of these CPSE companies are leaders in their respective industries such as defence, energy & fuel rural electrification etc. Tax Benefit: The CPSE ETF is a Rajiv Gandhi Equity Saving Scheme (RGESS) compliant fund, enabling the investor to claim a deduction of 50% of the investment amount from their taxable income under the Section 80 CCG of the Income Tax Act. 5

7 Exhibit 3: Steady Performance adds weight to the Investment Proposition 25.00% 20.00% Scheme Performance 19.49% 15.00% 15.15% 10.00% 9.35% 5.00% 5.02% 0.00% CAGR Returns Since Inception* 1 Year CAGR Return CPSE ETF Nifty 50 TR *Inception Date: 28th March, Returns are for the period ended 30th November, 2016.Source: SMC Global Research The comparision in Exhibit 3 of the of the CAGR returns of the CPSE ETF and the NIFTY 50 Total Returns Index for the period beginning from the date of the inception of the CPSE ETF depicts that the CPSE ETF has outperformed the broader market benchmark. Similarly, return comparison over the previous year also shows that the CPSE ETF has beaten the benchmark by a mile (outperformance of 14.47%). Moreover, loyalty benefits and upfront discounts in any Further Fund Offer (FFO) will amplify the returns for investors just as they did during the initial New Fund Offer (NFO). Thus, other than the risk factors emanating from the inherent nature of equities and tracking error of funds, the CPSE ETF in light of its many advantages is a superior thematic fund. 6

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