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00:00Hello and welcome to The Mutual Fund Show.
00:11We have a new launch from the Kotak Mutual Fund House called the Kotak MNC Fund.
00:17Harsha Upadhyaya, CIO, Equity of Kotak Mahindra joins in to talk to us more about this new
00:22offering.
00:23Hi Harsha, thank you for taking out the time to talk to us today.
00:27I believe you have a new offering called the Kotak MNC Fund.
00:32You want to start by telling us what is the primary objective of this fund and how does
00:36it differentiate from the other equity funds in your portfolio?
00:41Sure.
00:42As the name suggests, this fund will be a thematic fund investing predominantly in multinational
00:49companies.
00:50So, as per the asset allocation, at least 80% of the assets would go into investing
00:56in multinational companies.
00:58And it's an open-ended equity fund.
01:00It's already open from 7th of this month as a new fund offer and we'll be closing on
01:0621st of October going forward.
01:10So, this is a fund which is a thematic fund and suitable for those investors who look
01:17for a stable kind of a product since most of these multinationals have been established
01:23companies in their own sectors and have weathered a lot of downturns and business ups and downs
01:30in the past several decades.
01:32We believe that at this current juncture when valuations are at the higher levels, this
01:38is something which will add to stability in the portfolios.
01:41Harsha, given the focus on MNCs, what criteria will you be using to select companies for
01:49this fund?
01:50Is it a specific industry, a specific geography or a specific sector that you would be inclined
01:56towards?
01:57The way we have defined the multinational companies, it would comprise of three different
02:03segments.
02:04The first segment would be those companies which are promoted by foreign companies where
02:09the foreign promoter has more than 50% shareholding, so essentially subsidiary companies of foreign
02:16multinationals but listed in India.
02:19The second segment would be the joint ventures of foreign companies and those would also
02:27be available for investing.
02:28And the third segment would be Indian owned, Indian listed companies, however, they may
02:34have exports revenues of more than 50% by exporting into regions outside India or they
02:42may have manufacturing locations abroad and collectively that percentage is if more than
02:4950% that also qualifies to be a multinational company.
02:54So essentially, this is how we have defined MNC and number of sectors are available for
03:01investing here.
03:02There are at least about 15 different industry segments that are available for investing
03:08and I would say it is a subset of any diversified fund wherein we would look to invest only
03:15in the multinationals but otherwise the sectoral choices are as wide as any other diversified
03:22fund.
03:23Varsha, how do you evaluate the growth potential of multinational companies in India compared
03:28to domestic firms?
03:30The fact remains that in a domestic company there is the home bias and there is a sense
03:35and understanding of what happens on ground.
03:38With multinational companies which are sitting outside this country, that job might get harder
03:44and probably carry a little more risk I would imagine.
03:48As I mentioned earlier, we would be looking at investing in Indian listed multinational
03:53companies.
03:54So to that extent, most of these companies would have a significant business within India.
04:00Yes, there is also a segment which is going to be focused on exports where export revenues
04:06are more than 50%.
04:08Those companies would be probably dependent on global growth or global market conditions
04:14etc.
04:15But it is a good mix of all of these companies.
04:16But essentially India listed companies.
04:20And as far as the growth is concerned, if you look at past growth, they have actually
04:26done a slightly better than nifty basket in terms of market performance and also in terms
04:31of businesses.
04:33These are essentially businesses which are more stable one could say, a very well established
04:40businesses.
04:41The brand equity is very high.
04:43Generally most of these companies have technological superiority over peers in the industry.
04:50And by and large, the financial metrics would be of superior profile when you look at multinationals.
04:58Their ROE profile, their profit margins, all of these metrics generally are better than
05:05other companies that are listed.
05:07So I would say to an extent, you are investing in a basket of companies, which in the past
05:13have had consistent track record in terms of growth and profitability, and have also
05:18shown better resilience through market cycles, both in terms of business performance as well
05:24as stock market behavior.
05:26Harsha, would it be fair for me to assume that given the run-up and the froth, some
05:32of the markets such as ours and some complain that we are an expensive market, but we have
05:37always been an expensive market, the timing of this fund launch somehow coincides with
05:42that?
05:43I mean, is there any specific economic trend you are looking to capitalize on as you bring
05:48this product to the market or is it a product that was ready to be launched and hence comes
05:52in at this time?
05:53That's a good question, Samina.
05:56First of all, as we spoke about, these companies have had consistent track record.
06:01So to that extent, timing is not so important.
06:04They have delivered across cycles and across market phases in different sectors of the
06:09economy.
06:10That's one.
06:11Secondly, when you look at the market backdrop at this point of time, definitely we are also
06:16looking at valuations as something which is a bit of a worry, at least for the broader
06:23end of the markets.
06:26And if you believe that valuations are on the higher side, obviously, you need to, when
06:31you are launching a new fund, you need to keep the possible investor experience in your
06:37mind.
06:38So to that extent, we wanted to launch something which has flexibility for the portfolio managers
06:45to move in and move out of different sectors, because if it's a narrow theme or a single
06:49sector thematic, then obviously come what may, whether the business fundamentals are
06:56going, are becoming challenging, or if the valuations are expensive, even then the portfolio
07:01manager doesn't have leeway to really move out of that sector.
07:05So we wanted to avoid those kinds of funds to be launched at this point of time, given
07:09the valuations in some of those themes.
07:13The second was, this offers not only breadth and width in terms of choices, it also gives
07:20you a lot of choice in terms of multiple sectors.
07:24So that's where we believe that, not only you have got a set of companies which are
07:30very, very consistent compounders in the past, but also if need be, one can move from one
07:36sector to another, which allows that flexibility to portfolio manager.
07:42Harsha, you know, some may argue that investing in a thematic fund is for an individual investor
07:48who has a slightly higher risk profile, because it takes taking two decisions.
07:54One is entry and exit.
07:56But the thematic fund that you are launching is slightly different, I would imagine.
08:00In your opinion, what is the risk profile, what is your ideal customer base, and how
08:07much percent of average risk profile investors should look at allocating to this fund?
08:15For any thematic investments, one should not be putting too much of their investments into
08:22this bucket.
08:23Although, as I explained, this particular product, while it is called a thematic product,
08:28it has a lot more flexibility than a usual thematic fund.
08:33But still, I would say, maybe not more than 10-15% of your allocation should go into this
08:38sort of a fund.
08:40And also, the horizon needs to be long-term, as most of the equity investments should be
08:45geared for long-term focus, and this also should be for long-term.
08:51So if you keep that in mind, I think even at elevated valuations of today's market,
08:56this is a reasonable choice, because as I said, in the past 15 years, for example, MNC
09:02index has outperformed NIFTY by about 3 percentage points.
09:07This is about the past performance, there is no indication of guarantee in terms of
09:11what is going to happen in the future.
09:14But this superior growth has also come at a much lower volatility, because the beta
09:19of MNC index is much lower than even NIFTY index.
09:23So this is a combination where likely volatility is going to be much lesser than overall market.
09:31And in the long run, these companies are expected to deliver better growth and profitability
09:37as compared to the rest of the market.
09:39So that's a choice that we are offering investors.
09:43You know, I don't know whether this is a valid question, but I'm still going to ask you,
09:46the pool of MNCs available is fairly limited.
09:51How do you ensure that the portfolio or the offering is well diversified?
09:56Actually, we have seen the investment choices that we will have.
10:01There are about 190 companies today, as per the definition that I shared earlier on the
10:06show.
10:07190 companies and more than 15 sectors which are available for investment.
10:12So obviously, it is quite diversified, although it's a thematic fund, it is quite diversified
10:18in terms of the choices that are available.
10:20And we are confident that we'll be able to pick and choose 40-50 good companies from
10:25this pool of 190 to make a portfolio.
10:29Harsha, what benchmark index will the Kotak MNC fund be compared against?
10:35I mean, how do you expect the fund's performance to stack up against the benchmark and which
10:39benchmark?
10:41The benchmark for this fund would be NSE MNC Total Return Index.
10:45And since it's an active fund, there is no need for us to really buy only stocks that
10:52are part of the index or to the same extent, etc.
10:55There is an active choice that we will make in terms of building the portfolio from three
11:00segments as, if I have to repeat it again, one, the foreign subsidiaries, which are multinationals.
11:07Second, it could be joint ventures of a foreign company.
11:11On the third bucket will be Indian-owned, Indian-listed company having more than 50%
11:16of turnover coming from exports or more than 50% of assets being located in regions outside
11:22India.
11:23So these are the kind of companies that we will look to include in the portfolio.
11:27There will be some amount of currency fluctuations, I would imagine, Harsha, even if it's small.
11:33Is that something you're concerned about?
11:34Is that something you would be watching out or hedging closely?
11:37Yes, since some of these companies will have operations or assets outside India as well.
11:43So there will be some currency-related risks that would be there.
11:48But that would be there for every other export-oriented company that you could have in a diversified
11:53fund as well.
11:54So by and large, I think what we have been doing to mitigate that risk in diversified
12:00funds will continue in this fund as well.
12:03But I don't think it's one of the big concerns at this point of time.
12:08We have to be careful in terms of selecting export geographies or businesses which have
12:16a lesser cyclicality than probably than the others.
12:21So that's what we will have to do while selecting the stocks in the book.
12:25Also, Ken, I don't know whether this is relevant, but I'll still ask you, would you be sort
12:30of consciously making choices between dividend-paying MNCs and those that are focused on capital
12:36appreciation?
12:37Definitely.
12:38Multinational companies, by and large, have been companies which have had higher average
12:45dividend payout, one can say, simply because these are all highly cash-generating businesses
12:53and they don't come to market very often.
12:57I mean, when have we heard some of these MNCs coming to market to raise further equity,
13:01et cetera?
13:02So to that extent, their ROE profile is very, very strong.
13:05Their dividend-paying ability and capacity is much higher and they do pay higher dividends
13:10in most cases.
13:13So yes, that will be something that will play out as well.
13:16So it offers a lot more financial stability as a basket, I would say.
13:22And most of these companies also have very low leverage by nature of their high cash-generating
13:28business.
13:30So to that extent, yes, these are superior companies from financial metrics, definitely.
13:38One last question to wrap up this conversation with this fund specifically, and this is for
13:42viewers who are potentially considering investing in this NFO.
13:47What is the fee structure of this NFO and are there any exit lows or specific costs
13:51that investors should be aware of?
13:54This is similar to any other equity-oriented fund where, as per the SEBI regulations, there
14:00are slab-wise total expense ratios that are capped.
14:03So there is a ceiling that is prescribed based on how much we collect in terms of money.
14:09And on an ongoing basis, where the AUM is, that determines the total expense ratio.
14:14So there is nothing unusual in this fund.
14:16It's similar as any other equity-oriented fund.
14:19Right.
14:20Harsha, I'm going to ask you a question that is somehow related to MNCs and also very relevant
14:25around this time, and that's the Hyundai IPO that a lot of people have gotten excited about.
14:30It is an MNC that's going to be listing in India and could potentially inspire other
14:33MNCs to list on our exchanges.
14:37What have you made of it?
14:38Do you feel like this is an opportunity you would aggressively consider given the fact
14:42that you've launched a fund and you have a pretty significant MNC that's going to hit
14:45the street?
14:46Sameena, we would be in the middle of the IPO at the time of – middle of NFO at the
14:52time of IPO.
14:54So I don't think we would be able to participate in the IPO in this particular fund.
14:59And anyways, I would not like to discuss our view on the individual companies, but you
15:06are right.
15:07As we go ahead, we will see more of these foreign-promoted companies, which are currently
15:11privately held, coming up for listing.
15:14There are a couple of them in the pipeline over the next few months.
15:17We could also see more Indian companies crossing that hurdle of 50% exports turnover over the
15:24next few years, given that our government has been focusing on the policies to promote
15:29exports and companies are also building those capabilities.
15:33And there is definitely a space in the global trade and commerce for some of these companies.
15:38So definitely, while today we may have about 190 companies as investment universe, I am
15:45sure that over the next couple of years, this universe is only going to increase and make
15:49sure that we will have more opportunities for investments.
15:52Harsha, like I said, it would be unfair if I don't get a view on the markets.
15:56I have a little bit of a market conversation with you, since we have you on the channel.
16:01And at a time when things are looking difficult, markets have been volatile.
16:05Of course, the decline on the benchmark might not sound too large, because we have been
16:09waiting on this impending correction for maybe mid last year.
16:13But the fact remains, investors are worried, NAVs are dropping, worries are rampant.
16:18Suddenly, China has become a problem we need to talk about.
16:21Valuations have always been a concern.
16:24How do you feel about the markets right now?
16:25Are you using every dip as a buying opportunity or you think better times are ahead, in terms
16:31of being a buyer?
16:32See, clearly, valuations have been on the higher side and they have been moving up over
16:38the last several quarters as well.
16:41So definitely, our view remains cautiously optimistic at this point of time.
16:45We are probably more comfortable on the large cap side as compared to mid and small cap
16:50side, where we believe valuations have become more elevated.
16:55And also, there are a couple of red flags that we need to look at at this point of time.
17:01The June quarter results were not so great.
17:03June quarter was the weakest after the COVID pandemic, in terms of year-on-year numbers,
17:08both for large caps as well as mid and small caps.
17:11The September quarter, where we will start seeing results coming in now, is also likely
17:17to be quite muted.
17:19So to that extent, I think the festive season will be critically important to see whether
17:28the full-year numbers will be achieved or not.
17:30And given the fact that valuations are on the higher side, definitely an eye should
17:35be kept on earnings growth trajectory from here on.
17:38Second is, despite the geopolitical conflict until about a week or 10 days back, crude
17:44was behaving quite benign and it was even hitting newer lows every day.
17:50However, very recently, we have seen a spike in crude oil prices.
17:54At these prices, it may not be a concern, but if it continues to move up from these
17:58levels and move higher, it will definitely put more pressure on our economy as well as
18:04our corporate earnings profile.
18:06So to that extent, I think we need to keep these two things in mind, especially given
18:10that valuations are on the elevated side.
18:14Harsha, what has been the average cash positions across all your funds up until last week?
18:20Yeah, Samina, we usually don't use cash as a tool to manage volatility.
18:25Even when we are defensive, we would look for opportunities on a relative basis which
18:29are looking better and move there.
18:31So to that extent, our cash levels have been more or less normal levels at about 2% to
18:361.5% across most portfolios.
18:40Incremental money that flows in gets allocated?
18:43Is that a fair assumption for me to make?
18:45Yeah, it may not be that whatever money comes in today will get deployed tomorrow.
18:51But generally, we don't try to keep too much cash at any point of time because cash is
18:59always a double-edged sword, right?
19:01While you may feel that you will probably reduce downside if you build cash at an elevated
19:06valuation perspective, it may also happen that market may not come down or may go up
19:12even further.
19:13So to that extent, we don't take those calls.
19:16And also, just to give an example, suppose you are looking for a 70% allocation in equity
19:22funds and you have chosen one of our funds as a vehicle, let's say.
19:27You have already made a decision that your personal allocation should be about 70% into
19:34equity.
19:34Now, if we go and create 10% at one point of time, at another point of time, 20% cash,
19:41then your allocation, which is intended to be 70%, would be much lower than those numbers,
19:46right?
19:47That's not something – and each individual investor has already made a decision about
19:51intended equity allocation levels.
19:53So we can't be changing our cash levels, which will create an anomaly.
19:57So to that extent, we make sure that whatever money comes in, the investor has already decided
20:05that it should go into equity funds and equity investments.
20:08That's a choice already being made.
20:09So if that has been made, then our job is easier to make relative choices within available
20:15opportunities.
20:16That's how we look at overall investments.
20:19You know, very frequently we say that when the markets are getting tough, and of course,
20:24even if they are not getting tough, I think the one advice is to ensure you rebalance
20:28your portfolio enough to maintain the asset allocation at the asset level.
20:33Of course, we also talk about, you know, rebalancing at a product level or at a stock
20:38level.
20:38Now, most people would say that use this opportunity to, you know, take some positions
20:44off the table in overvalued sectors, move to sectors that are undervalued.
20:48But the fact remains, value investing currently is a challenge, even if you are a fund manager
20:53or a stock picker, retail investor in that sense.
20:56I mean, this is advice we give, but in fact, this is hard to execute.
21:01Have you managed to move to sectors or spotted opportunities that others could replicate
21:05or, you know, individual investors could do?
21:08See, I think every now and then individual investors and every investor needs to look
21:14at asset allocation and see whether there have been any deviations from the intended
21:20levels and set it right.
21:22So, as far as our portfolios are concerned, we keep looking at stocks and sectors to see
21:29what was our intended risk level, what are the valuation levels today, what are the growth
21:34estimates that are in front of us?
21:36Is it better?
21:37Is it turning worse?
21:38All of these equations we keep evaluating.
21:43And in the past couple of months, we have taken some money out of auto, auto component
21:47sector, industrials to some extent.
21:50And the profits that were booked from these sectors have gone into slightly more defensive
21:56bets, such as IT services and consumption, I would say.
22:00So, to that extent, yes, our portfolios have turned a little defensive by not creating
22:06cash, but by choosing sectors where we believe probably there is not so much of a valuation
22:12risk.
22:13And also, wherever the mandates have allowed, we have moved away from a little bit of mid
22:18and small caps towards large caps.
22:20That's again, because on a relative basis, we find large caps to be a better place at
22:25this point.
22:27You know, smaller sector, not smaller actually, sectors that have really not got the best
22:32of the markets recently, even though we have seen a bit of a gain coming from metal stocks
22:37last month.
22:38The fact remains that a lot of managers have started betting on metals, on betting on the
22:43recovery in China or the fact that demand will eventually pick up, even though from
22:47what I understand, LME inventories remain at record lows.
22:50How do you feel about metals?
22:52And how do you feel about banks?
22:53Because if you've got to play consumption, if you've got to play the India theme, one
22:57of the pillars of that would be banks, I would imagine.
22:59On banks, clearly, we continue to watch that space while we are still underway at the sector
23:06level.
23:07But we believe that this is one sector where there is a valuation comfort.
23:12If at all, there is any sector which is below 2019 valuation levels, that's banking in our
23:17opinion.
23:18So to that extent, there is valuation comfort.
23:20Of course, there are short term headwinds that a banking sector needs to get over with.
23:26So we will be looking at this space very closely to see whether valuations will get further
23:34attractive or if some of those headwinds start to diminish, then obviously, that's the time
23:39to go overweight on the industry.
23:41But clearly, I think this is an industry which cannot be avoided.
23:45And we do have reasonable position at this point of time.
23:50On metals, it's still a sector which is driven by global factors.
23:57So to that extent, what happens to global growth, what happens in China in terms of
24:02stimulus and kind of supporting the economy, all of those would be very critical for at
24:08least a rising part of the equation.
24:13The only good part is in this cycle, most of the Indian metals sector, which is the
24:18most of the Indian metal companies have cleaned up their balance sheets and they're not as
24:23leveraged as they were in the previous cycle.
24:27So to that extent, their ability to really manage the downturn is much higher in this
24:35period.
24:37Given all of this, yes, at this point of time, we don't have a overweight exposure, but it's
24:43not that we have completely avoided metals in our portfolio.
24:46We do have some small exposures.
24:50Any contra calls?
24:54No, in this market, it's difficult to find contra calls.
24:57The banking is probably one space where, yes, there are short-term headwinds, nothing exciting
25:03seems to be happening.
25:05However, at least on the valuation side, there is a lot more comfort.
25:09So that's something that we have continued to hold in our portfolios.
25:13Well, thank you very much, Harsha, for talking to us, telling our viewers your thoughts on
25:17the market and of course, calming nerves that probably are fairly nervous at this stage.
25:21And more importantly, good luck with the Kotak MNC fund.
25:25We'll hopefully speak to you soon.
25:27With that, we're completely out of time on this edition of the Mutual Fund Show.
25:30Thanks for watching.