All Systems Ready | Value Research With basic funds up and running, a thrust on its equity funds is required if Kotak AMC is to enter into the big boys club.
House Voice

All Systems Ready

With basic funds up and running, a thrust on its equity funds is required if Kotak AMC is to enter into the big boys club.

Like other AMCs, Kotak Mahindra has also reaped the benefits of the bull-run in equity markets. Over the course of the last year, equity assets as a per cent of AUM have increased from 3.68 per cent to 9.59 per cent. The AMC has also retained its position as the eighth largest AMC in the country. But from the investors' perspective, size does not matter much. We examine the functioning of this AMC over the past year and how has it benefited investors.

2003 was a mixed year for Kotak AMC. The fund's flagship equity scheme Kotak 30 generated 93.57 per cent to outperform its benchmark the Sensex, which was up 72.89 per cent. But this was not much compared to the average diversified equity fund, which returned 111.99 per cent and the fund found itself in the third quartile of its category. This is in line with its overall performance over the years when it has usually remained in the second or third quartile of its category. On the whole, the current bull market and its average standing have combined to give K 30 respectable long-term (five year) returns of 23.35 per cent as on April 19, 2004.

Kotak MNC and Kotak Tech also continue to carry on with their sectoral mandates. Kotak MNC has performed in line with other funds, which have a MNC focus. At a time when other technology sector funds have diversified their investment objectives, Kotak Tech remains sharply focused on the technology sector. In fact it must be recalled that the evolution of Kotak Tech has been quite different from other technology-oriented funds. When Kotak Tech fund was launched it already had a broader investment universe. Its stock selection included companies in areas as diverse as biotechnology, space, farming and entertainment. At different points in time it held stock such as Dr Reddy's Labs, ICICI Bank, MTNL and Saregama India. Then in early 2002 it narrowed its focus exclusively to the information technology sector.

The newest fund in Kotak's armoury has been Kotak Global. This fund aims to invest in globally competitive Indian companies. In terms of sectors, this translates into pharmaceuticals, auto ancillaries, engineering, textiles, business process outsourcing and IT services. The fund collected Rs XXX in its initial public offering and this has in significant measure contributed to the increase in Kotak's equity assets. At the moment, Kotak is also planning to launch a mid-cap equity scheme as well as a fund of fund, which will invest in schemes of other AMCs.

Another area where Kotak Mutual fund has been different from its competitors has been in its efforts to try and protect returns by moving into cash. Thus way back in 2002 the fund arrived at the view that "opportunities to profit will come by again but lost capital never does". Thus from 2002 the fund has armed itself with the mandate to move up to 40 per cent of its portfolio into cash if it feels that the situation so warrants. Other AMCs have on the other hand launched exclusive schemes where the fund manager has the freedom to flee to cash.

Kotak AMC has also been busy on the debt side. The AMC has launched a monthly income plan, a dynamic income scheme and a provident fund plan under its gilt scheme Kotak Gilt. In July 2003 the AMC also added a floating rate fund to its arsenal. Just like other AMCs Kotak has also added a full series of institutional plans under its existing debt schemes. In fact Kotak has peen a pioneer in the debt markets. The fund was the first to launch a gilt fund in end 1998. While the idea of institutional plans took off in late 2002 Kotak already offered a separate plan for institutional investors as early as November 1999. On the whole Kotak AMC has a full portfolio of funds on the debt side and offers all possible options here.

Fine-tuning has also been taking place in Kotak Balance, the AMCs hybrid equity oriented scheme. In October the fund changed the range of its equity exposure from 50 to 60 per cent to 50 to 70 per cent. It also changed the time period for rebalancing from three working days to seven working days.

All systems are up and running at Kotak Mutual Fund. The fund has also been innovative in many of the things it has done whether it be the field of gilt funds, its attempts to protect returns in its equity funds or the value addition to existing products. These initiatives have, however, not yet been able to catapult Kotak into the big league. How this AMC handles its equity funds in the coming years could be a crucial factor.

Strategy Note
Ajay Bagga
Kotak Mahindra AMC

On the change in equity fund managers
Our key goal is to generate attractive returns for our fund holders over time and across business cycles. In terms of the investment management process, we seek to assemble an optimal mix of managers and strategies. The key cornerstones of this are analysis, discipline and experience. The strength of the process means that there is continuity, even if a particular member of the fund team is no longer present. As such it's a team-oriented approach, rather than one of a "Star" fund manager.

View on sector funds
The concern about sector funds is the sustainability of the mandate to generate value over a period of time. There should be depth and breadth in terms of stocks available in that sector, which will generate sustainable superior returns. Overall, sector funds should be included as a small part of a well-diversified portfolio, with the full prior knowledge that they represent a higher risk category than diversified equity funds.

Plans for the coming year
We will differentiate ourselves in the market through product innovation, transparency of operations and efficient service. We forsee an increasing share of household financial savings being channelised into mutual funds. The winners in this scenario will be fund houses, that can provide customers with personalised, yet low cost, needs-based products in a convenient and trustworthy fashion throughout the financial life cycle of the customer via a robust network of distributors.

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