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MNC Funds: Down but not Out

Multinational funds have disappointed investors as multinational company shares went out of flavour, but it is not the end of the road

My son works for a multinational," is something one often hears a proud father say. But do you ever hear a proud investor say, "My fund invests only in multinational companies." Perhaps you have, but that pride and satisfaction in the voice have disappeared lately. Investing in MNCs has been a risky activity in India. Though the companies themselves have generally been excellent prospects, ever-shifting attitudes of the government and the parent MNC have made such investments an uncertain affair.

While diversified equity funds have always had healthy MNC exposures, there are three Indian funds dedicated to investing only in MNCs. Launched during the heady days of 1998-2000, none of the three have had as good a time as they may have expected. Let us take a look at their prospects. First, a little history. Undoubtedly, the nadir for foreign businesses in India was in 1977 when Morarji Desai's Janata Party government threw out all multinational companies that were unwilling to reduce the parent company's stake to 40 per cent or below. Some, like Hindustan Lever, Philips and Colgate complied by issuing shares to Indian investors while others, most notably Coca-Cola and IBM, walked out.

Characteristically, companies that valued their technology or other trade secrets (like Coca-Cola with its formula) left, while low-tech consumer goods companies were happy with reduced stakes too. Incidentally, this great exodus was driven by the then industry minister George Fernandes, who is still playing variations of the same tune 25 years later.

The reduction of the promoter stake was a blessing in disguise for the capital markets as MNC promoters inevitably added more stock to their floating stock. In fact, many of these companies were privately held before they were forced to dilute their stake. These disinvestments brought a class of stock to the market that was of an inherently different quality than the run-of-the-mill Indian stocks at the time. For investors, the biggest plus of owning MNC stocks was that they tended to give high dividends on a sustained basis. The reason is clear — dividends were practically the only way that MNCs parent, unlike Indian promoters, could get returns on their investment. Since the late eighties, Hindustan Lever has paid 26 dividends aggregating to a mind-boggling 2,000 per cent.

Most MNCs have been very focused businesses. The kind of unrelated diversification that Indian promoters undertook — mostly based on which licences they were granted — were almost never adopted by the MNCs. As a result, they stayed in the same businesses that they were in across the world where they could tap management and manufacturing expertise. Obviously, all MNCs were professionally managed in the sense that there was no promoter's family supplying an endless stream of sons and nephews to take up senior positions like the typical family-run business. While all these reasons combined to make MNCs the blue chips of the markets, their stock prices took off only after the mid-nineties when it became clear that the economic reforms were here to stay. After liberalisation, Fernandes's 1977 diktat was reversed and MNCs were allowed to raise their stakes to higher levels than before.

As the desirability of MNC stocks increased, they became favourite of the mutual funds. In the late nineties, as most asset managers exotic equity funds as a marketing device, the idea of a MNC fund was born, although the MNCs are clearly not a 'sector' in any sense.

UTI was the first off the block with UGS 10000 in May 1998, Birla MNC was launched in December 1999 and Kotak's K MNC was launched in March 2000 when the markets had already turned downwards. Given the timing of their launch, all three have witnessed a rough market since their launch (see: MNC Fund Performance). The returns so far have been rather uninspiring. A part of the problems of MNC funds are because of Hindustan Lever, a key holding which has moved in a narrow range for the past few years because its core business is facing saturated demand. While the stock continues to be a top holding for UGS 10000, Birla MNC has reduced its holding, while K MNC has exited from it. Broadly, the funds' sector moves have concentrated in healthcare, FMCG and engineering stocks to some extent. And of course they too were tempted by the siren song of the technology sector. Except for K MNC, which is a conservative player, the other two gave in to temptation and their tech holdings accounted for 30 per cent of assets in early 2000. In such cases, it becomes clear that in sectors like technology, being an MNC is incidental — the stocks are actually only sector plays.

What does the future hold for these funds? As with the past, it is the ownership issues that cloud the horizon. The wheel has come full circle and the MNCs parents are now moving en masse to buy out the public holding and delisting the shares. In 1999, 6 foreign promoters made open offers to their Indian shareholders. The number rose to 8 companies in 2000 and 14 companies in 2001. In 2002, Cadbury, Kodak and Reckitt Benckiser have made open offers.

So where does this leave the MNC funds? They are best looked upon as a special case of the diversified equity fund in which the stocks are of an inherently better quality than the market as a whole. While a shrinking universe of MNC stocks is a reality, there will be enough float of the remaining MNCs to give these relatively small-sized funds room to maneuver for the foreseeable future.

Birla MNC: This fund has been able to weather market storms relatively well because of its prudent approach to growth investing. A fine stock selection, a well-diversified portfolio across stocks and industries and a usually high cash position provides further cushion against market downturns. Birla MNC is a good choice for investors seeking growth with less risk than the norm.

K MNC: Since its launch, it has struggled well, guarding its assets in a freely falling market since its launch. A major change is visible in the fund. Today, it shows grit with a big stake in healthcare stocks, which account for nearly a third of its portfolio and a strong mid-cap bias. K MNC is a good contender for the aggressive investor's attention.

UGS 10000: The largest MNC fund with Rs 130 crore assets has posted a mere 3.37 per cent annualised return since launch and with big stakes in large-cap consumer stocks — ITC and Hindustan Lever. UGS 10000 should appeal to investors seeking a steadier take on growth.