Many investors often perceive investing in Public Sector Undertakings (PSUs) as a safe investment bet, in their objective of wealth creation. Since the Government is the largest shareholder, they get hooked and believe that can really maximise shareholders wealth.

Roaring participation in Initial Public Offerings (IPOs) of PSUs is a confirmation to interest evinced by investors. IPOs of Coal India, NTPC and Power Finance Corporation (PFC)in the past have received an overwhelming response. Coal India for example, received 15.9 lacs of applications (which is the highest number since 2003-04). Likewise, PFC got oversubscribed 76.7 times. And thus getting lured by this splendorous participation, mutual fund houses too started playing the PSU theme song and they too launched dedicated PSU sector funds to capitalise on investor perception.

The Government has recently moved ahead with its proposal to set-up Exchange Traded Funds (ETFs) for PSUs, and invited proposal from mutual fund houses having equity assets of over Rs 2,500 crore.The Department of Disinvestment (DoD) has said, mutual fund houses registered with the Securities and Exchange Board of India (SEBI) and who have at least five years of experience would be eligible for setting up PSU ETFs.Moreover, the department has said, that mutual fund would be responsible for conducting roadshows for share sale through ETFs.

It is noteworthy that the proposed PSU ETFs would be a basket of shares of 20 profit making Central Public Sector Enterprises (CPSEs). "The CPSE ETF could be launched as a New Fund Offer (NFO) followed by further tranches and the Government may provide appropriate discount for different  investors," the DoD said while inviting bids from mutual fund houses.

We are of the view that, setting up of PSU ETFs could serve as an additional tool for the Government to monetise its shareholdings in those CPSEs that eventually form part of the ETF basket (of 20 companies). Moreover the move is intended to obtain better price for equity of state-owned companies during the disinvestment process.

But would it be a good investment for you?

Well, we are of the view that although the PSU companies have some non-commercial objectives to achieve, they are expected to run professionally and generate profits to be able to sustain growth. Also while the Government has held controlling stake in the PSUs (which could be a strong argument in favour of investing in them), the nature of control by the Government in PSUs has always been questionable.Thus while many get lured by the support which these companies have from the Government, in our view it need not be criteria for it being safe.
 

How has BSE PSU fared vis-à-vis BSE 200

Base: Rs 10,000
Data as on January 07, 2013
(Source: ACE MF, PersonalFN Research  

Thus far as depicted by the chart above the broader index - BSE-200, has performed better than the BSE PSU over the last decade, except some phases such as from 2003 to 2006 where PSUs have benefited due to reforms benefiting them.So, if one were to invest Rs 10,000 each in the BSE PSU and BSE-200 a decade ago (i.e. on January 07, 2003), he would have a yielded a sum of Rs 47,225 and Rs 62,703 respectively as on January 07, 2013.
 

Performance across market cycles

	BULL PHASE	BEAR PHASE	BULL PHASE	CORRECTIVE PHASE
	01-Aug-2005 - 09-Jan-2008	09-Jan-2008 - 09-Mar-2009	09-Mar-2009 - 05-Nov-2010	05-Nov-2010 - 07-Jan-2012
BSE PSU	41.2%	-51.0%	63.5%	-22.8%
BSE-200	51.6%	-59.0%	84.4%	-14.3%

NAV as on January 07, 2013.Returns over 1-Yr are compounded annualised
(Source: ACE MF, PersonalFN Research)  

Likewise the table above reveals that while PSUs have depicted their trait of being safe during the bear of phase of the market (occurred due to negative ripples sent by the U.S. sub-prime mortgage crisis), the BSE PSU index has underperformed during the bull phases of the Indian equity markets. Moreover in the current corrective phase of the Indian equity markets, PSUs have faltered vis-à-vis the broader index.

Mutual funds launched to tap the potential of the PSU themes too have thus far eroded investors’ wealth. Hence in the background of the above we believe that investing PSU ETFs would not be a worthwhile investment proposition.

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