MNC funds & Opportunity and Special Situations funds : Are they worth a look?

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MNC funds & Opportunity and Special Situations funds : Are they worth a look?

  1. 1. 1Mutual Fund Analysis March 14, 2012 MNC funds & Opportunity and Special Situations funds : Are they worth a look? Preamble: Mutual fund schemes which follow the investment strategy of benefiting from the various opportunities that are arising out of special situations have managed to yield comparable returns over the long run. These are the schemes from the equity oriented categories such as opportunity and special situations, that follow the strategy of grabbing such opportunities and get a boost to their NAVs. There are special situations or investment opportunities that the equity markets throw up to the investors from time to time like delisting, Merger & Acquisitions, buy back, demerger, foraying into a new business area, changes. in economic policy, laws, technology etc. Such events can impact prices in the short term not only of the companies that involved but also at times of the peers in the industry where they belong to. The mutual fund schemes which follow this investment strategy are proactively taking advantage of these opportunities. However, the performance of such schemes depends mainly on the fund managers expertise in identifying and tapping such promising investment opportunities. A brief note on the performance of the mutual fund categories Opportunities, special situations and MNC follows. The aim of the study is to understand how the mutual fund schemes capitalize the special situations and opportunities which are arising out from the equity market. For the evaluation, opportunities and special situations categories are clubbed together as the objectives of the schemes are identical. The thematic MNC category adopts investment objectives that are similar to normal equity diversified schemes, We have included for our study MNC category as the category is getting benefited from the run in MNC stocks at this point of time. The two schemes in the MNC category have showed distinguished performance in the span of short term period of last one year as they reaped benefit from the rise in prices of MNC companies due to various reasons including the SEBI’s mandate of implementation of new listing norms.MNC, Opportunity and Special Situations funds Retail Research
  2. 2. 2Mutual Fund Analysis contd… What are Opportunity & Special Situation Funds? The opportunity and special situation schemes are diversified equity funds which invest in companies across market cap segments and across sectors depending on opportunities available at various point in time. They also take contrarian bets by investing in stocks which are undervalued in anticipation of an increase in price. Special situations are out of the ordinary situations that companies find themselves in from time to time. Such situations present an investment opportunity to the Fund Manager who can judge the implications of that. opportunity that can unlock value for investors. There could be many such situations that may have the potential to unlock value of the companies. Some of these situations are- 1. De-listing: The removal of securities of a listed company from a stock exchange owing to the minimum public shareholding going below the minimum prescribed. In this special situation, the prices of shares may go up on the expectation that the companies may come out with an open offer at a substantial premium to the current market price. 2. De-Mergers: Corporate actions often unlock a lot of value for the investors. Demergers may result in separation / spin-off of business operation / activity from some other business operation / activity. These events may lead to value unlocking for the company. 3. Mergers: Merger of businesses or companies may result in synergies business activities. This may result in value unlocking for the companies getting merged. 4. Debt Structuring: There may be corporates that have higher debt on their balance sheets resulting in lower profitability and cash flows. The cost of debt may also be high resulting in reduced profitability. Any attempt by the corporates to either reduce the debt burden or swap the existing debt with lower cost options may result in value unlocking. 5. Buy-Back: Companies may consider a buy-back of their shares from the market due to various reasons like - company has substantial free reserves, management is confident of the future growth potential, meeting with the regulatory norms, etc. These events may lead to value unlocking for the company.MNC, Opportunity and Special Situations funds Retail Research
  3. 3. 3Mutual Fund Analysis contd… 6. Other Situations: There could by many other events that may result in share price appreciation. Situations like introduction of new products, new segments, acquisition of new customers, R&D related developments, management re-structuring, capital infusion, revaluation of Fixed Assets, Properties or other assets, etc. might result in a favorable environment for stock price appreciation. The opportunities funds, apart from the above mentioned special situations, have schemes specific objectives. They may be based on theme, capitalization, etc.. Such opportunities and special situations that are thrown up from the equity markets can be utilized by the schemes to boost their NAVs. However, this strategy fully depends on the discretion of the fund manager as to how he/she screens and understands the situation on taking call to bet on such special situations. If some of the calls go wrong it may lead to value destruction of net assets. However, with Indian companies increasingly looking at mergers and acquisitions, domestically and internationally, and using other corporate actions to unlock value, there are the possibilities of such situations recurring in the market. What are MNC Stocks & Mutual Funds? Multinational corporations (MNCs) are enterprises which manage production or deliver services in more than one country. MNCs in India are attracted towards the country’s large market potential, business opportunity by virtue of its sheer size and growth, labour competiveness, increasing purchasing power and emerging as the manufacturing and sourcing location of choice for various industries. Most of MNCs in India operate mainly in the field of FMCG and pharma spectrum. However, they operate in niche segments, bring in global expertise and offer consistent growth. These companies are perceived to offer better products and enjoy brand loyalty. Most MNCs have strong cash balances, high dividend payout ratios, low debt-to- equity ratios and healthy return ratios. UTI MNC and Birla SunLife MNC are the two schemes which are coming under the category of MNC where they invest primarily in the MNC stocks that are either listed Indian arm of global companies where the MNC parent holds more than 25%, or where there is a substantial FII and MNC parent combined holding that adds up to over 50%.MNC, Opportunity and Special Situations funds Retail Research
  4. 4. 4Mutual Fund Analysis contd… An investing opportunity from de-listing offers: There has been an opportunity for mutual fund schemes to capitalize from a special situation which has arisen by the implementation of new listing norms. In June 2010, the SEBI had made it mandatory for all listed companies to have a minimum 25% public shareholding by mid-2013. The move prompted companies with lower public shareholding to either bring down the promoter holding to 75%, or delist the company. Investors are betting big on share prices of foreign promoter owned stocks, hoping that the companies may delist their Indian arms and come out with an open offer at a substantial premium to the current. market price. As expected, investors and the mutual fund schemes which hold such stocks have benefitted well as the share prices rose on reports of delisting plans of some such companies. The market prices of 6 out of 23 MNCs in which promoters hold more than 76% stake each, doubled from June 2010 (see the table below). These 23 stocks have given an average 46% returns, compared with 8% increase by the benchmark CNX MNC over the period. The promoters of Alfa Laval recently fixed a final price of Rs 4,000 a share, as the exit price for accepting shares successfully tendered in the delisting offer. The stock has appreciated 214% from Rs 1,275 on June 4, 2010, since the implementation of new listing norms, and increased almost 1.6 times after the company’s announcement of delisting plans on September 16, 2011. MNCs are mostly delisting from the local bourses as their operations in India are not large in size compared with their operations in some other developed countries. They are also not comfortable offering higher equity offering to public, which is why they are looking to delist from the exchanges by offering premium. Many more such delisting offers are likely to hit the Street over the next few months. In case if delisting plans does not fructify, it could lead to a temporary fall in the price. However, in the case of multinational companies with good fundamentals, the prices could recover in the medium term due to their fundamentals even if they fail to delist.MNC, Opportunity and Special Situations funds Retail Research
  5. 5. 5Mutual Fund Analysis contd… Mutual Funds holding on MNCs which stakes are held at least 75% & above by foreign promoters:. The above table suggests that MNC and Special/Opportunities fund can take/increase exposure to any of the above companies based on the expectation of Fund Manager on delisting or other triggers.MNC, Opportunity and Special Situations funds Retail Research
  6. 6. 6Mutual Fund Analysis contd… Details of Opportunities & Special Situation Category: The Opportunities & Special Situation category managed to outperform the Equity Diversified category marginally over time frames of one, three and five year periods. The category posted 1%, 32% and 8% of compounded returns respectively for the periods while the equity diversified category registered 1%, 30% and 8% of CAGR returns respectively. HDFC Mid cap opportunities, Reliance Equity opportunities and UTI opportunities are the top performing schemes in the category. The performance of the category was notable during bull and high volatile period due to this defensive investment approach. However, the performance of such schemes depends mainly on the fund managers expertise in identifying and tapping such promising investment opportunities. The portfolios of. the schemes saw the components are theme based and invested across market capitalization. Most of the schemes in the category prefer to invest maximum in large-cap stocks though they have a leeway to spread across capitalizations. Portfolios are churned moderately as each scheme maintain the ratio below 100%. The category (standard Deviation of 1.05%) seems to be less risky compared to equity diversified category. From the table below, one can see that Birla and UTI schemes are either underperformers or perform in line with equity diversified category. Fidelity scheme is a defensive low risk low return scheme, while HDFC and Reliance are more aggressive and have outperformed the equity diversified category both in good times and bad times. Top performing schemes from Opportunities & Special Situation Category: Note: Trailing Returns up to 1 year are absolute and over 1 year are CAGR. NAV/index values are as on March 12, 2012. Portfolio data as on Feb 29, 2012.MNC, Opportunity and Special Situations funds Retail Research
  7. 7. 7Mutual Fund Analysis contd… Details of MNC Category: Both the schemes from MNC category - UTI MNC and Birla Sun Life MNC managed to register spectacular returns over periods. Notwithstanding the fact that the schemes belong to thematic category, they can be compared with equity diversified schemes as far as return part is concerned. They have been consistent performers over periods irrespective of any kind of market cycles. The category registered compounded annualized return of 17%, 40% and 15% of returns for the periods of one, three and five years while the equity diversified category posted 1%, 30% and 8% of CAGR returns respectively. Though the category adapts defensive investment strategy (as most of MNCs in India operate mainly in the defensive field of FMCG and pharma spectrum), they managed to register higher risk. adjusted returns with higher margin even in bear and high volatile phases compared to other equity oriented categories. The schemes - UTI MNC and Birla Sun Life MNC invest in the MNC stocks that are listed Indian arm of global companies. The latest portfolios of both the schemes witnessed investing mainly in mid-cap stocks from FMCG, Pharma, Auto and Consumer Durables. They are the least risky schemes among equity diversified schemes as they registered 0.75% & 0.70% (equity diversified category 1.06%) of Standard Deviation for last one-year period. The corpus of the category as per latest data is at Rs. 439 crore. The schemes can be the safer bets for risk averse investors when the equity market turns more volatile. Relative performance of schemes from MNC Category: Note: Trailing Returns up to 1 year are absolute and over 1 year are CAGR. NAV/index values are as on March 12, 2012. Portfolio data as on Feb 29, 2012.MNC, Opportunity and Special Situations funds Retail Research
  8. 8. 8Mutual Fund Analysis contd… Conclusion: MNC funds are all-weather slightly defensive funds and typically do better than equity diversified funds. UTI MNC fund is a good pick in that category. Special situation and Opportunities schemes throw up HDFC Mid cap opportunities and Reliance Equity opportunities as two schemes that take advantage of opportunities and perform better than equity diversified schemes. Fidelity Special Situation scheme is a low risk low return scheme that may be sticking to special situations picks to the most and is good for defensive investors.. Analyst: Dhuraivel Gunasekaran. Source: NAVIndia, ACEMF, Schemes’ SID & NEWS Papers. HDFC Securities Limited, I Think Techno Campus, Bulding –B, ”Alpha”, Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone (022) 30753400 Fax: (022) 30753435 Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non-Institutional Clients.MNC, Opportunity and Special Situations funds Retail Research

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