The Hindu Business Line : K-MNC: Sell

INVESTORS in Kotak Mahindra MNC fund may liquidate their holdings and switch to a diversified equity fund with a good track record. This recommendation is not related to the fund's performance. Since its launch, the fund has outperformed market indices such as the S&P CNX Nifty. However, there appears to be no compelling reason for an investor to restrict his investments to a portfolio of MNC stocks now

For one, though MNCs are traditionally favoured for their perceived greater transparency and shareholder-friendliness, in reality MNCs have shown themselves to be no more shareholder-friendly than Indian companies. In fact, the valuation premium that MNC stocks enjoy vis-à-vis Indian companies has narrowed over the past three years.

Second, the MNC focus severely restricts the choices available to the fund manager in terms of stocks and sectors. The problem is further aggravated by the spate of MNCs delisting from the bourses. Third, as the fund is now invested to a large extent in FMCG and pharma stocks (which are defensive in nature), which have high valuation levels relative to the rest of the market, the upside potential may be limited in the event of a rally in equities across the board.

Performance: Since launch, the fund has done substantially better than the market, registering negative returns of around 9 per cent per annum, against negative returns of around 14 per cent on the S&P CNX Nifty. However, since the equity market has been on a secular decline since the fund's debut, the NAV hovers below par, at Rs 7.89 per unit.

Portfolio: By end-July 2002, K-MNC had about 34 per cent of its assets invested in pharmaceutical stocks. FMCG was the next largest exposure at 25 per cent. Between December 2001 and July 2002, the portfolio has undergone a significant transition.

While the FMCG exposure has been cut sharply from 44 to 25 per cent, exposure to pharma stocks has been enhanced to 34 per cent. Given the sluggish growth prospects for FMCG companies, this is probably a sound move. The fund has recently restructured its investment profile so that it can hold a significant portion of debt and cash, if necessary.

While this ploy may be a good defensive strategy in a falling market, it could reduce returns if the fund does not call a rally in equities at the right time.

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K-MNC: Sell