Slow but Steady - Investing only in high dividend stocks

Investing only in high dividend stocks proved effective for UTI Dividend Yield in the downturn

UTI Dividend Yield Fund has done exceptionally well in its four years of existence. Investing only in high dividend yielding stocks may not have worked wonders for the fund in the historic bull-run. But the strategy proved to be effective during the downturn. Off the six 'dividend yield' equity diversified funds that are in the market currently, UTI Dividend Yield is the front runner, both in terms of performance and size. With Rs 1,168 crore worth assets under management, it is the largest among the Dividend Yield funds.
PERFORMANCE
The fund was launched in June 2005, which probably weighed against it as the era supported only growth oriented stocks and did not fancy value-based investments. The fund thus failed miserably to beat the benchmark BSE 100 and the major indices in the first one-and-a-half years of its launch.
In the second half of 2005, the year of its launch, the fund managed to generate a respectable return of 30%, but alas it was lower than the 40% returns generated by Sensex during the period. In 2006, its returns declined further to about 20%. BSE 100 meanwhile generated 37% and 41% respectively during this period while the Sensex outsmarted the funds in both the years by a wide margin.
However, picking up pace thereafter, the fund marched way ahead of the indices in the following year. 2007 saw the fund generate absolute annual returns of about 70% vis-à-vis 46% of the Sensex and 58% of the BSE 100. While this did bring the fund the much desired recognition, it did fall a few spaces short from some of the magnificent performers of that year.
Given its investment philosophy of investing only in high dividend yielding stocks, the fund had abstained from taking any momentum calls and thus kept some of the outperforming sectors simply out of its investment loop.
While the fund could not protect itself from the vagaries of the stock market, it definitely emerged as one of the top-performing funds last year by restricting its fall to a great extend. BSE 100 returned about -55% in 2008 and the returns from the Sensex were placed at about -53%. UTI Dividend Yield managed to cap its fall and returned about -45% during this period. However, with the advent of the bullish sentiment in the market once again, the fund's returns have begun to fall short of the indices. Since the beginning of 2009, the fund has managed to return just about 39% compared with over 50% returns of the Sensex and the BSE 100.
PORTFOLIO
Large cash calls may be one of the reasons for the fund's average performance in 2009. Despite the markets having zoomed to new heights, the fund manager does not appear convinced with the fundamentals and valuations as the portfolio continues to have about 22% in cash. From less than 10%, the fund had increased its cash levels to over 30% in light of the equity downturn. While the fund has begun to reduce this exposure over the last two months, it continues to sit heavily on cash thereby missing out on some of the golden opportunities that the market has now thrown open.
While the fund did have a good exposure to mid-caps in its initial years, the same has been on a declining mode since Sep '07. Currently it continues to have about 60% of its equity portfolio in the large-cap dividend yielding stocks. It has an average dividend yield of 2.2%, which is nearly double the average dividend yield of its benchmark BSE 100. Some of its high dividend yielding stocks includes Hindustan Unilever, Glaxo Smithkline Pharmaceuticals, Bajaj Auto, Great Eastern Shipping, Tata Chemicals, Clariant Chemicals and NIIT Technologies.
The fund has always had a bias for the financial services sector and currently 19% of its equity portfolio is dedicated to this sector. Some of its top holdings in this sector include SBI, ICICI and PNB, all of which have gained immensely on the bourses in the last couple of months.

OUR VIEW
UTI Dividend Yield's current portfolio gives it a beta of 0.83, which aligns its movement to the indices. However, the fund has missed out on opportunities in the recent rally and needs to gear up in the near future. While one should not expect wonders from this fund as it has a restricted invest mandate that forbids it from taking moment calls, it has proved to be an ideal investment for those who would rather be safe in a rally than feel sorry in a downturn.