Over the past two years, MNC funds have done exceedingly well. They delivered way ahead of the Sensex in 2010 and fell by much less in 2011. The reason being their portfolio construction which tilts towards Pharma and Healthcare. Being defensive in nature, such stocks are good to hold on in turbulent market conditions. Ajay Garg, Fund Manager, Birla Sun Life MNC, though, says that there much more to these funds than just the two sectors. "It is not only about being in Pharma or Healthcare but diversification across the sectors that has helped us," he says.
MNC funds are not sector funds. Their investment universe is not restricted to specific sectors. It is more apt to describe them as specialised diversified-equity funds. The predominant difference being that their investment universe comprises only those companies where a foreign company - a multi-national corporation - holds a majority stake. Since most of MNCs are in pharma, FMCG and basic/engineering sectors, these sectors account for more than half of MNC funds' portfolios.
The FMCG sector is the most heavily invested one in the portfolios of MNC funds. As on April 2012, UTI MNC had an exposure of around 27 per cent to that sector while it stood at 20 per cent for Birla Sun Life MNC. Even Healthcare has a weight of 12 per cent in both portfolios.
Though both these funds have a similar universe, their portfolios are different and so are their levels of concentration in terms of sector and stock bets.
As a category of funds, they generate better returns during a downturn or during volatile phases, but struggle to give a superior return during a bull rally. "During a bull rally they will not give similar returns compared to other equity funds, but they do provide protection during falling markets," admits Garg. In 2007, when growth stocks were on a roll, these funds underperformed the Sensex by a significant margin.
A more worrying trend though is the reduced universe. A fund manager informs us that since 2006 over 85 MNCs have been delisted from the Indian market.So, why the craze for investing in MNC funds? Possibly due to the deep pockets of the parent company and better corporate governance. Nevertheless, it does not make for a good investment case since regular equity-diversified funds can also invest in such stocks. During the initial days of such funds there was some logic in buying them since foreign companies were better managed, had better corporate governance and generally made high dividend payouts. Today, there are many domestic companies that share the same characteristics.
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