There is an aura around MNC stocks. And, investors are ready to pay a premium to own them. This is why multinational companies listed in India are old stock market favourites. Factors such as a perception of good corporate governance, strong brand identity, superior technological prowess, robust finances and attractive return generation track record, have helped MNC stocks. There are a handful of equity funds that bet on this theme, and the latest to join the ranks is HDFC MNC Fund. The new fund offer period ends March 3, 2023. Let us find out more about investing in MNC stocks and how this fund is going to be different.

Defining the MNC stock universe

MNC funds are open-ended equity schemes following the multinational company theme. Coming to HDFC MNC Fund, it defines MNCs as companies having foreign promoter shareholding of over 50 per cent, or companies that form part of the Nifty MNC index.

The benchmark index Nifty MNC comprises 30 stocks, where the foreign promoter shareholding is more than 50 per cent. ABSL MNC and UTI MNC funds follow a similar definition, but replace the 50 per cent number in the index with ‘majority’ shareholding requirement. ICICI Pru MNC and SBI MNC funds have a much broader investible universe. SBI includes companies with more than 50 per cent turnover from outside of India and foreign-listed companies, in addition to foreign ownership. The ICICI MNC fund invests in companies with global operations, which may or may not be listed in India. Essentially, the global market performance is also captured by ICICI and SBI, while the domestic performance of foreign companies is captured in ABSL and UTI MNC funds. There is a fifth fund, the Kotak Nifty MNC ETF, launched about six months ago.

Why MNC stocks

MNCs are deep-rooted and firmly placed in India. The longevity of MNCs can be put down to a unique combination of good corporate governance, trusted brands, focus on innovation and strong balance sheets. Many of them have well-known brands, with a strong presence in everyday life.

MNCs have exhibited strong growth with higher profitability. In fact, over the last 10 years, the NIFTY MNC Index has delivered better top line growth vis-a-vis the Nifty 500, with higher profitability (8.7 per cent for Nifty MNC vs. 7.3 per cent for Nifty 500). This data excludes Vodafone.

Along with profitability, MNCs generally focus on cash flows and balance sheets, thereby resulting in low leverage. MNCs tend to have a good track record of free cash flow generation and high dividend payout (54 per cent for Nifty MNC versus 24 per cent for Nifty 500).

Strong profitability and a superior capital allocation track record results in consistently higher return ratios for MNCs, thereby aiding wealth creation. The 10-year average ROCE for Nifty MNC is 17 per cent, 200 basis points higher than Nifty 500. Similarly, the Nifty MNC’s average ROE is 15 per cent versus 12 per cent for Nifty 500.

Valuations, stock performance

All these advantages are captured in MNC stock valuations. The price to earnings of Nifty MNC is 62 times versus 22 times for Nifty 500 and 21 times for Nifty 50 (as on January 31, 2023).

But one parameter where MNC stocks edge out others is that they do offer a neat dividend yield (2.8 per cent), which is more than double that of the market.

In terms of stock performance, the Nifty 500 and Nifty MNC outperform each other at different points in time, thereby presenting a strong case for diversification. Over longer time frames, the Nifty MNC TRI (total return index) has fared better than Nifty 500 TRI. Over a five-year rolling time-frame, Nifty MNC has outperformed Nifty 500 in 78 per cent instances, owing to its better resilience during market downswings (see table below).

HDFC MNC portfolio strategy

To be managed by Rahul Baijal, the new fund will employ a bottom-up approach to portfolio construction. The core of the portfolio would consist of MNCs. This would be in line with a focused strategy of a maximum 30 stocks, in line with the current mandate.

The HDFC MNC Fund will focus on growth and quality at reasonable valuations. It seeks to have a benchmark agnostic approach to sectoral allocation. At present, the Nifty MNC index provides exposure to seven sectors, with Industrials (27 per cent), Consumer Staples (23 per cent), Healthcare (17 per cent) and IT, Materials, Consumer Discretionary having 10 per cent each. Communication Services is at 3 per cent only.

The new MNC fund will adopt a multi-cap strategy with investment across market cap segments.

Up to 20 per cent of the portfolio could consist of any Indian company having at least a part of its turnover/ revenue from outside India, any company which is a franchisee of a foreign company and any other company beyond the above themes.

Our take

MNC funds usually have a risk profile that is higher than mid-cap and small-cap funds in terms of expected risk-return.

Mind you, such funds should not be the core of a portfolio and are best avoided by first-time investors.

MNC funds are good diversifiers to your existing portfolio since they invest in a stock basket having low overlap with broader equity indices. Have an investment horizon of 3-5 years if you consider adding MNC funds.