Need for thematic funds based on big corporate houses

Trusting company management is an important element in investing. A socially responsible management with high integrity could weather any storm. In India, quite a few groups such as Tatas, Birlas, TVS, Murugappa, Kalyani and Mahindras have earned that reputation by not only being socially responsible but by also giving market-beating returns to investors over the long term. They are critical to the economy as well if India is to achieve the Prime Minister's $5 trillion target within the next few years.

There are big corporate groups and some of the group companies are listed on the National Stock Exchange of India. Various categories of market participants have invested in the companies forming part of these groups that comprise the entire value chain of the business. However, when it comes to investing in a basket of stocks from a single corporate group, there are very few avenues for retail investors.

NSE Indices

On its part, NSE has launched indices based on Tata, Mahindra and Aditya Birla group companies. While the indices based on Tata group companies and Mahindras have outperformed by at least three percentage points, AB Group company index has underperformed the Nifty and Nifty 500 by 3 percentage ponts since April 1, 2005.

Though corporate group indices are designed to reflect performance of companies belonging to a particular corporate group, these ideas are yet to catch the fancy of fund houses as none of them have launched Exchange Traded Funds (ETFs) or thematic funds based on them.

Nifty Tata Group Index consists of 25 constituents, Nifty Aditya Birla Group Index consists of 8 constituents and Nifty Mahindra Group Index consists of 7 constituents. These indices are based on full market capitalisation method. The indices will include all the listed companies of the respective groups.

Besides, NSE has also Nifty Tata Group 25 per cent cap-based on free float market capitalisation. The index also managed to beat the Nifty 50 and Nifty 500 by one percentage point.

The fact they survived for a long period itself is a testimony to their capability to run the business and protect their integrity.

One of the reasons for the strong performance of these group companies is the quick decision-making. If the promoter is highly skilled and has strong integrity, he or she can generate significant returns to investors through their strategic actions.

Double-edged sword

But there is a flipside to group-based stock choices, especially when the boundaries between ownership and day-to-day management are hazy.

A wrong step by the promoter or personality clashes could destroy wealth across the whole group. Investors in Anil Ambani group stocks would have experienced such sharp value erosion.

To address the issue, the Securities and Exchange Board of India came out with a proposal to separate the post of Chairman and Managing Director, to give professionals more say in running companies.

Of course, it goes without saying that like sectoral themes such as pharma, IT, financial and banks, corporate group focussed investments can also be risky and highly cyclical. Sectoral funds are quite a popular among investors and fund houses have launched several products based on them. Despite sectoral funds carrying higher risk, investors are also buying some of these funds to earn long-term gains.

May be the time has come to seriously look at passive low-cost investment solutions in corporate groups. Exchanges should also launch more indices based on various other group such as Adani, TVS, Kalyani, Murugappa, Ramco and others.

Besides, exchanges and intermediaries should popularise the theme that give better return for long-term investments. Widespread tracking of business groups in markets may also incentivise business groups to set a high governance bar on their listed companies.

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