CPSE ETF a big draw with investors, has a host of structural positives: Goldman Sachs India

The exchange-traded fund of central public sector enterprises, which faced investor criticism for the way it was structured, will perform well upon listing, claims Sanjiv Shah, chief executive of Goldman Sachs Asset Management (India), the asset management company for the CPSE ETF. In an interview with ET, Shah says ETFs could become a popular disinvestment vehicle in India Edited excerpts

When are you planning to list the CPSE ETF and how do you expect it to perform?

We are targeting the CPSE ETF to be listed on April 4, 2014, subject to completion of prerequisite activities. Given the strong investor demand witnessed in the NFO, we believe the CPSE theme will continue to resonate with investors, and there will be a robust secondary market for the offering. We also believe that this offering will create awareness for equity ETFs in general and usage of equity ETFs for asset allocation in various sectors like banking and infrastructure as well as thematic offerings.

Except for a few gold ETFs, the instrument has not been very successful in India. Will the PSU ETF buck this trend?

We believe that the success of the CPSE ETF indicates that the Indian market is ready for rapid growth of equity ETFs. Investor realisation is increasing that ETFs provide a low-cost, transparent, rules-based structure that can be used for both strategic and tactical portfolio allocation. The CPSE ETF launch has also helped accelerate this trend and introduce ETFs as an instrument to a wider audience. Other factors like reduction in STT on equity ETFs and inclusion of ETFs for the Rajiv Gandhi Tax Savings Scheme will also benefit ETFs.

Do you see disinvestment through ETFs becoming popular?

ETF provides an ability to divest without impacting the price of the underlying shares, as was the case in FPOs, OFS and IPOs. This has also helped the government divest in 10 stocks simultaneously and promote long-term investments by retail investors using the loyalty bonus concept. For investors, it provides an opportunity to invest in well-performing diversified basket. Given these factors, we expect ETFs to become an attractive mode for disinvestment in future.

PSU ETF is likely to reopen for subscription in the next few weeks. How much are you planning to raise through the follow-on offer?

The CPSE ETF provides for a ‘tap structure’ that will be operational quarterly from July 2014, and which can be used as a mechanism for further disinvestment by the government. The quantum of potential disinvestment in each quarter will be decided by the government.

ONGC, OIL and GAIL together account for over 52% of the index. The energy sector accounts for nearly 60% of the total weightage of the CPSE ETF. Given that PSU stocks are surrounded by worries over earnings growth, production and political interference, would it be wise to invest in them?

The CPSE index was set up based on rules-based criteria, looking at CPSE company returns since 2009. We would not like to predict future returns, as there are always multiple factors impacting stock prices.

Why are stocks such as SAIL and BHEL not part of the fund?

Since SAIL / BHEL did not meet the criteria, they were not included. Why would one invest in CPSE ETFs instead of PSU funds, which are actively managed by fund managers and offer a diversified exposure to PSU stocks across sector? The CPSE ETF structure provides several structural advantages such as low cost, ability to benefit from real-time prices as well as the convenience of having the units available in electronic format in investors’ demat accounts. These factors will help attract investors into the CPSE ETF.

What are the incentives or assurances CPSE ETFs give to investors?

In the ETF structure, dividends are accumulated by the fund and included in the daily NAV computations, and hence, the benefit is not lost by investors. Also, the ETF has the option of paying out accumulated dividends periodically to investors.

What are the main reasons for the success of the CPSE ETF?

Our belief is the success of any product is a combination of great conceptualisation, seamless execution and effective marketing. In the case of the CPSE ETF, all these factors came together and investors really appreciated some of the product features, in terms of choice of the CPSE basket, the concept of loyalty units and the tap structure. The overall subscription has been to the tune of Rs 4,300 crore, and there is a good mix of international and domestic institutions and retail investors.

We received over 39,000 subscription applications, indicating that the product has been accepted by all categories of investors.