NFO Review- UTI Momentum Index Fund

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I don’t like writing reviews for New Fund Offers. Everyone claims to be doing something unique while all they are doing is the same old thing but offered in a new way. Once in a way, a fund comes that is truly different and worth looking deeper. 

For those of us who are Momentum affindos, it’s been a long wait for a fund that will replicate a decent momentum strategy. In May 2018, SBI had filed with SEBI a red herring prospectus for launching of an ETF on Nifty Alpha 50 Index. Unfortunately it never saw the light of the day.

Nearly two years later, UTI has now decided that it will try and break into the market with the first Index fund based on Momentum. The difference though is that this is a fund that will be based upon the Nifty 200 Momentum 30 Index which has a comparatively lower amount of real time data versus Nifty Alpha 50.

Since 2005, Nifty 200 Momentum 30 seems to have a slightly higher edge compared to Nifty Alpha 50 and even if we were to assume some of it due to curve fitting, Nifty Alpha 50 has shown a decent performance.

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Much of the literature on Momentum emphasizes on rebalancing at regular intervals. Most Do it yourself models for example use a Weekly rebalance (We use a Monthly rebalance) while international funds for most part use a quarterly rebalance.

Rebalance is a simple way to remove stocks which aren’t performing while adding stocks that are showing a better performance. In many ways, this is similar to Index changes we see where stocks are changed based on Market Capitalization changes. 

But since Indexes are more broad based, they tend to generally under-perform Momentum strategies which are more nimble and more concentrated. Take a look at the chart below showcasing the difference in returns between Nifty 200 and Nifty 200 Momentum 30.

In recent times, there has been a talk of how much of the performance of Nifty 50 can be attributed to just 10 stocks. A tweet from the CEO of Edelweiss

Momentum funds generally try to place the bets more with the top 10 than spreading it across and hence the slight out-performance relatively speaking. Over time, this slight out-performance can add substantially to the returns thanks to the 8th wonder of the world 🙂 

Is this a replacement for Do It Yourself Momentum?

The biggest advantage of investing in a strategy such as Momentum via a Mutual Fund is two fold. One, you don’t have to bother with the changes that need to be executed at regular intervals and second, the fact that Mutual Fund churn doesn’t have any tax impact. But the trade-off is lower returns.

For example, here is the comparison between the NAV of my investments and Nifty 200 Momentum 30

The difference is not because of any superiority of my strategy vs the one that will be followed by the fund but because of the Universe. As I wrote here, the key issue for those managing money based on Momentum comes down to Liquidity. This could be one reason the Index and the fund follow a 6 monthly schedule. 

With just two rebalances per year, the cost of slippage and fees will be reduced tremendously and in a way enables the fund to have a low tracking error. Since mutual fund churns aren’t taxed, all gains are captured (vs doing it either directly or through a PMS / AIF).

Rolling Returns Comparison

If you are a passive Investor, you are generally sold the idea of buying Nifty 50 (and if the seller wants to show some additional diversification he shall include Nifty Next 50) ETF’s / Index funds. Thematic / Sector funds are a no go for they require Timing the Markets (Blasphemy). 

When DSP came out with its Quant fund, I myself was a bit skeptical despite having been given all the data I wanted. The skepticism was also due to the slightly black box nature of the fund. No such issues are there when we are looking at UTI Momentum Fund. Not only is the selection criteria open, you can easily replicate the same yourself. 

Fund Managers like to talk about Concentration vs Diversification and based on their beliefs suggesting either one of them. What they forget though is that for their clients, this is not the only fund he or she will own. If you own 4 focussed funds, is your portfolio focussed? 

Having a lot of funds in itself is not bad. You will get market returns while also ensuring employment to a large number of folks. Why spend only 0.1% on an Index fund when you can get the same performance by spending 2.25% and spreading it over multiple mutual funds and PMS (if you are rich enough).

But if you are a real concentrated passive investor, nothing more than a simple Nifty 50 should do the trick for you. If you are such an investor, does it matter to invest into a fund like this is the question you should ask and based on the data I shall present below, my answer to that is Yes.

This doesn’t mean that you need to switch over 100% from Nifty 50, but over time I feel this can be a core fund that is comparatively similar in terms of risk to Nifty 50 while generating a small out-performance for the trouble.

3 Year Rolling Return Comparison

Data for Nifty 200 Momentum 30 starts from 2005 and hence we have 3 year rolling returns data since 2008. The Index beats Nifty 50 returns 86% of the time

5 Year Rolling Return Comparison

When we extend it to 5 years, the outperformance moves to 84% of the time. 

7 Year Rolling Return Comparison

100% of the time in the past, the Index has delivered better returns than Nifty 50.

10 Year Rolling Return Comparison

No change here either as the Index seems to comfortably beat Nifty 50

A caveat you may keep in mind is that the Index has been constructed using historical data and has not much of any real time data. But with the number of touch points being low, as long as NSE has used survivor free database to create the Index, I have strong confidence that the probability of the returns doing way worse once it starts being tracked and invested in real time is very low.

To conclude, if you are not a DIY Momentum Investor, this fund is worth looking into. Removes the hassles of DIY though the trade off is lower returns. But on the upside, allocation can be higher thus reducing the disadvantage a bit. 



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Prashanth Krish

Prashanth Krish

Prashanth is a Chartered Market Technician who believes in the Systematic Momentum Investing strategy. He runs his own portfolio advisory firm - Portfolio Yoga.
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