This document discusses mutual funds that focus on opportunities and special situations as well as MNC stocks and funds. It provides examples of special situations like de-listing, mergers and acquisitions, buybacks, and debt restructuring that could present investment opportunities. It finds that two MNC funds performed well in the past year by benefiting from rising MNC stock prices. Overall, opportunity/special situation funds and MNC funds may yield returns by capitalizing on unique company events and MNC growth, but performance depends on the fund manager's ability to identify opportunities.

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Mutual 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 manager's 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.
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Mutual 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.
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Mutual 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%.
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Mutual 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.
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Mutual 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.
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Mutual 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 manager's 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.
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Mutual 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.
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Mutual 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.
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