VR Logo

MNC Funds' High Returns: Cause, Effect and Illusion

MNC funds have reached the top of the performance charts. What does this signal to investors?

An odd combination of circumstances has meant that an almost forgotten type of equity mutual fund--MNC funds--have turned up at the top of the charts. This has piqued the interest of many investors, who are asking whether to start investing in these funds, and whether this is an indicator of some general trend. Not only is the answer to that question 'no', the very question is based on two big misconceptions.

The first is the nature of MNC funds themselves. This funds were launched in the 1990s, at a time when it was commonly believed among investors that foreign companies listed in India, as a class, were a better investment than Indian-promoted ones. Investors believed, not without reason, that many Indian promoters bled cash from their pubic companies, thus robbing investors to line their own pockets. Some did this more and some less, but almost all did this.

MNCs were also assumed to be generally better and more professionally managed, clean corporate governance, have easier access to newer technologies and additional capital. Even more important was their habit of paying high dividends, since this was how they repatriated profits to their parent companies abroad.

Much of this has changed over the years. Now, there are plenty of well-managed Indian companies, accounting and corporate governance standards have improved, and investors tend to care a lot more about price appreciation than than they do about dividends.

So why are MNC funds doing well suddenly? The reason has nothing to do with their investing in MNCs, but more to do with the kind of sectors and industries listed MNCs in India tend to operate in. Historically, due to the legal and regulatory environment inherited through the seventies and eighties, MNCs had minority stakes of the foreign parent and a widely owned stock. Most of these were FMCG and pharma companies.

However, with the changed regulatory environment, newer MNCs that have come in after the early 90s are generally not listed. Moreover, many of them are cost-plus operations that don't leave much profit in the Indian operation others have no interest in getting involved with the Indian capital-raising process. For example, huge foreign businesses in India--Korean and Japanese giants like Samsung, LG, Toyota, Honda or Hyundai are unlisted. IBM Global Services is one of the biggest employers in India, but will never be listed here. The result is that today, practically speaking, MNC funds are thematic funds that are FMCG and pharma funds with a smattering of some other stocks. They don't have many of the types of stocks that have done badly, like real estate, infrastructure and PSUs.

I would call this a coincidence, a mere historical curiosity. Listed MNCs in India, and mutual funds that invest in them, are in no longer representative of any deliberate investment pattern.

There's also a second, more fundamental reason why fund investors should not get swayed by such trends--there is never any good reason to invest in any sectoral or thematic fund. As the market twists and turns, your fund manager must have the freedom to move to invest in any sector, theme or size of company.

When you invest in a mutual fund, you are paying a fund manager to make investing decisions for you. It's his or her job to figure what type of investment is best at the moment. Whether it's infrastructure or FMCG or technology which is the right area to invest in, that's part of the service that you are supposed to get when you invest in a mutual fund. However, when you get tempted by a fund that's supposed to limit itself to a particular subset of the market, then you are pre-empting the fund manager and making an investment choice yourself.

Inevitably, the time period over which a narrow theme does well is a subset of the time period over which the entire market does well and by selecting a particular theme, you lower your eventual returns.