Birla MNC Fund: Switch

Recommendation: Switch

Aarati Krishnan

THE Birla MNC Fund is among the better performing equity funds in the bear markets of 2001.

This is largely on account of the fund's exposure to defensive stocks in the pharma and FMCG sectors. Unitholders can, however, use this opportunity to pare exposures to the fund. This is because of two reasons.

One, the fund was launched at a time when MNC stocks enjoyed a substantial valuation premium, the rationale being their strong cash flows and good corporate practices. However, the valuation gap between MNCs and their Indian counterparts has narrowed considerably over the past couple of years.

Further, when it comes to moves such as restructuring and re-alignment, MNCs have shown themselves no friendlier to the minority shareholder than their Indian counterparts.

Therefore, restricting the investment universe to MNC stocks alone may not result in any benefit. In fact, it may result in some missed opportunities, as has happened with Indian pharma stocks in the case of Birla MNC Fund.

Two, with several MNC parents taking their Indian arms private in recent times, the universe of investment-worthy MNCs appears to be shrinking. This may place a further restriction on the fund managers of Birla MNC Fund. In the circumstances, holding a fund dedicated to MNC stocks appears to offer no special benefit. Investors may switch to an ordinary diversified fund with a consistent track record.

The portfolio of Birla MNC Fund has been quite actively managed over the past year. The following features emerge from a study of the portfolio over the past year:

The fund has adhered quite strictly to its mandate of investing in MNC stocks, with few Indian companies featuring in the portfolio. Even these -- Britannia Industries and ITC, for instance -- have had a foreign or MNC linkage.

Pharma and FMCG stocks have consistently accounted for a substantial chunk of the portfolio, taking up 35-50 per cent of the net assets over the past six months. The sectoral allocations appear to be partly enforced by the fund's mandate. Since the FMCG and pharma sectors feature the maximum number of investment-worthy MNCs, the fund's sectoral allocations too have swung towards these stocks.

The defensive nature of the two sectors appears to be behind the fund's good performance over 2000 and 2001. However, defensive stocks, by their very nature, may not perform as well as the others in a broadbased market rally. This, indeed, has been the case in the recent rally in the markets over the past three months, when several diversified as well as sectoral funds have outperformed the Birla MNC Fund.

Apart from its restricted investment focus, the fund's sectoral focus also appears to have had a hand in the recent slowdown in performance. The high exposure of over 25 per cent in FMCG stocks (with their relatively high valuations) and a high cash position of around 27 per cent by end August 2001, has probably prevented the fund from capitalising on the recent rally as well as some of its peers.

The fund had a fairly high allocation to IT stocks (the MNCs, such as Hughes Software and Digital), in 2000 but wound down this exposure practically to nil by August 2001. In October 2001, the fund made a re-entry into the sector by re-acquiring Digital Globalsoft.

The fund's focus on MNC stocks has resulted in quite a few missed opportunities. Though the pharma exposure was over 20 per cent throughout the past year, the fund has probably not reaped the benefits of the recent rally in pharma stocks. While the Birla MNC Fund portfolio features such stocks as Pfizer and Hoechst Marion, it is stocks such as Dr. Reddy's and Ranbaxy that have registered the sharpest appreciation in value over the past few months.

Fund facts: Launched initially as Apple Midas the Goldshare, the Birla MNC Fund was subsequently restructured as Birla MNC Fund on the fund's takeover by the Birla SunLife Asset Management Company. The fund is relatively small, with a net asset size of Rs 63 crore in October 2001. The fund charges a 2 per cent entry load. Its NAV stands at Rs 24.06 per unit for the Plan A and at Rs 25.7 per unit for Plan B.