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`Lack of opportunities not a concern'

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Value unlocking in stocks facing out-of-ordinary conditions may take longer than expected. Hence, the focus on an investment horizon of at least three years. MR MIHIR VORA, HEAD, FUND MANAGEMENT - EQUITIES, HSBC MUTUAL FUND

Aarati Krishnan

HSBC Unique Opportunities Fund, a fund that proposes to capitalise on companies in unique situations such as mergers, turnarounds and out-of-favour sectors, is a new closed-end fund that is currently open for investments.

Mr Mihir Vora

, Head of Fund Management- Equities, HSBC Mutual Fund responded to a few queries from Business Line on what the new fund has to offer to investors:

Indian companies

have

indulged in a slew of overseas M&As in recent months and have been sharply marked down by the market. Since M&A situations are specially targeted by this fund, what are your views on such acquisitions?

The recent few instances of large M&A announcements hitting stock prices negatively should not be generalised. There are different kinds of situations in the broad category of M&As a) merger of two companies b) acquisition of businesses c) sale of businesses, and d) sale of subsidiaries.

There have been numerous instances, over the last five years, of Indian companies undergoing one or more of the above situations.

Most active sectors in the case of acquisitions have been the software, pharmaceuticals, auto ancillary and metals sectors. In many of the cases, there has been huge wealth creation. The key to success in M&A transactions is the valuation that the acquirer pays. We look at fundamentals and valuations very closely and will buy only when we feel value is being added, by the acquirer.

Moreover, in many cases, Indian companies are the acquirees too, in which case we would benefit as shareholders when the buyer bids up the price (for instance, i-flex, Mphasis BFL and Digital Globalsoft ).

With commodity stocks trading at low valuations at present, would they be candidates for this fund's portfolio?

We are looking at sectors which are out-of-favour in the markets currently, such as oil marketing companies or sugar. Just being cheap does not automatically translate into the stock qualifying for this fund. We may not buy sugar stocks now, but whenever such significant underperformance happens, this fund will take a very close look at valuations and decide whether there is potential for outperfomance over the long term, from existing levels.

Given that this fund has a restricted mandate, are you confident of finding a big enough universe of stocks in special situations, to invest in?

The scale of activity happening in the corporate sector is at an all-time high. Last year saw activity in excess of $60 billion in the form of corporate actions.

In fact, we studied the stocks in the BSE-100 and found that 48 of them experienced out-of-ordinary conditions in the last two years. Hence, the number of opportunities is not a concern.

In a bullish market, stocks in unique situations tend to be unearthed and re-rated much before the event actually materialises. Do you believe this kind of a fund may work better under bearish market conditions than in bullish ones?

We believe the issue is not so much of bull or bear markets. The relevant point to note for investors in this fund is that the value unlocking in stocks facing out-of-ordinary conditions may take longer than expected. Hence, the focus on an investment horizon of at least three years.

But to answer your question, if the re-rating happens fast in a bull market, the fund may actually out-perform much earlier than expected, which is something no one will complain about!

In our experience, closed-end equity funds (especially those launched over the past year or two) have not delivered as good a performance for investors as their open-end counterparts. There appears to be less pressure on the fund house to deliver. Your comments...

HSBC Unique Opportunities Fund has an exit option on a daily basis. Investors are, hence, free to move out after deduction of exit load (towards unamortised expenses).

Many equity funds in the Indian context start out with contrarian objectives but eventually morph into plain vanilla diversified funds due to short-term pressures on performance. How will you manage such pressures?

We manage each of our funds in a `true-to-label' fashion and have systems to monitor adherence to investment objectives, which are different for each fund.

We believe that fund performance should change with differing objectives as the risk-return profile of each fund varies.

We believe that this is a very important differentiator for our products.

(The NFO closes on February 22. Investors are advised to compare this offer to existing funds with similar objectives before deciding to invest.)

(This article was published in the Business Line print edition dated February 18, 2007)
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