What's misleading about Kotak Global India Fund is its objective: Generate capital appreciation from a diversified equity portfolio of securities issued by globally competitive Indian companies.
When we asked the fund manager what parameters he looks at when he declares a company to be “globally competitive”, we realised we were barking up the wrong tree. The fund looks at companies that have a stream of global revenue - those that focus on the international market for growth and are likely to benefit from outsourcing and exports. Quite a revelation! What's also perplexing was the choice of the benchmark. This thematic fund's portfolio has often been predominantly tilted towards mid-caps. But instead of a more broad-based index in terms of market cap, it was benchmarked against the Sensex.
When the fund outperformed the Sensex in 2005 (45.14 per cent against 42.33 per cent Sensex returns), this was not cause for concern. But when the fund significantly underperformed in 2006 (30.76 per cent against 46.70 per cent Sensex returns), it was promptly changed to S&P CNX 500 from January 2007. Once done, the returns did not seem that awful (33.99 per cent S&P CNX 500 returns). Maybe, in all fairness, the change was just one of the initiatives brought about by Nikunj Doshi who took over the fund in November 2006. Working with a thematic fund is limiting. A new fund manager is forced to work within the theme. Given this constraint, Doshi did fairly well.
He began by reducing exposure to textiles and increasing it to the logistics, financial services and pharma packaging segments with new picks like Reliance Communications, ICICI Bank, Jubilant Organosys, Allcargo Global Logistics and Bilcare Ltd. Even an energy stock made an appearance in the portfolio. The reason: Aban Offshore derives majority of its revenues (in dollars) from providing oil rigs on hire to MNC oil exploration companies. Healthcare, once a heavily invested sector, has given way to chemicals and consumer non-durables.
His second move was to balance the risk that comes with a concentrated theme. Instantly, the number of stocks rose to 30 (Nov 2006) from just 21 (Oct 2006) and exposure to the top three sectors decreased (42.81 per cent from 48.11 per cent). Despite the flexibility to invest in any market cap or sector, investors are exposed to risks associated with currency fluctuations and global growth opportunities. The strengthening of the rupee against the dollar is a case in point and probably why the fund manager took high cash calls in April (11.35 per cent) and May (6.12 per cent).
Also, investors should not expect a great performance from the fund during phases where other 'themes' are doing well. If the fund is unable to invest in metal, cement, telecom or media, don't blame the fund manager if these stocks rally.
This article was originally published on August 10, 2007.
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