Invest in MNC funds for exposure to high-quality businesses: Experts

Since valuations are higher in this space, a 7-yr horizon with 10% capital outlay can be looked at

The Nifty50 total return index (TRI) is up 10.1 per cent over the past three months. MNC funds, which invest in multinational companies, have on an average run up of 11.4 per cent over this period.

The four active funds in this category -- from Aditya Birla Sun Life, ICICI Prudential, SBI, and UTI Asset Management Company (AMC) -- have a combined AUM (assets under management) of Rs 12,760 crore. Kotak AMC launched the first passive product in this category, an exchange-traded fund, at the beginning of this month.

The sectors to which MNC funds have large exposure participated in the recent rally. “Most of the MNC stocks belong to segments like FMCG (fast moving consumer goods) or industrials (which include capital goods, engineering and auto ancillary among others). All these sectors have done well in the recent rally,” says Harsha Upadhyaya, president and chief investment officer, equity, Kotak Mahindra AMC.

Exposure to quality stocks

Investing in an MNC fund can help investors play the China plus one theme. “Global companies are beginning to regard India as a favoured manufacturing destination for exporting to other economies,” says Roshan Chutkey, senior fund manager, ICICI Prudential AMC.

Investing in these funds also gives investors the exposure to a basket of high-quality stocks. “MNCs generally tend to have wide moats, robust management, technological edge, strong balance sheets, strong global brands, and high return on equity (RoE),” adds Chutkey.

Their global experience makes these companies robust and enables them to withstand market cycles better. “MNC companies bring a lot of expertise to local markets, based on their experiences in other markets. They are able to apply many of the management initiatives, that have worked in other countries, to the Indian market,” says Upadhyaya.

 

These companies are also able to tap into their parents’ strengths. “They have efficient R&D (research and development) capabilities and an adequate financial cushion,” says Vinit Khandare, chief executive officer (CEO) & founder, MyFundBazaar India.

He adds that owing to the ability of these stocks to generate stable returns over the long term, investing in these funds can enhance the risk-adjusted return of an investor’s portfolio.

Funds within this category are also more diversified than the typical thematic fund.

Lesser leeway

With the number of MNC stocks listed on the Indian exchanges being limited, the fund manager is constrained in where he can invest. “He would not enjoy the same degree of freedom as a fund manager running a diversified-equity fund with a quality style. The latter would have the freedom to invest in high-quality domestic as well as MNC stocks, wherever the outlook and valuations are attractive,” says Arun Kumar, head of research, Fundsindia.com.

These funds may be able to provide only limited exposure to some sectors. “As the economy recovers, the banking and financial services sector is expected to flourish. However, this sector has very few MNC stocks,” says Khandare.  

These funds also have high exposure to sectors like FMCG, which generally tend to be valued at a higher multiple than the rest of the market.

High royalty payments to parents can affect the earnings of these companies in the short run (though the impact of this could get ameliorated if their sales volumes grow at a robust pace in the domestic and export markets).

The investor also faces duplication risk when he invests in these funds. Many of these stocks may be already present in the diversified-equity funds he holds.

Should you invest?

Despite being thematic funds, MNC funds have given consistent returns across market cycles. Investors should enter these funds via systematic investment plans and have at least a seven-year horizon. These funds should be kept in the satellite portfolio and exposure to them should be limited to 10 per cent of total equity holdings.