Month: April 2013

I am usually reluctant about writing a review on a mutual fund NFO as the standard conclusion for most of these is that you should wait a couple of years or so before investing in them.

Usually there is nothing that a new fund offers that is so irresistible that you overlook the fact that it has got no track record and invest immediately.

This is true for the PPFAS mutual fund also, and that’s primarily the reason I’ve held back on reviewing it. However, there have been at least two comments in the Suggest a Topic page to review this fund, and therefore I’m going ahead and doing a small post on it.

This fund is being launched by the Parag Parikh Financial Advisory Services Ltd., which is the parent company and offers Portfolio Management Services to its clients among other things. They manage Rs. 300 crores right now, and I’m fairly a certain a lot of readers are familiar with Mr. Parag Parikh himself as well.

This is an actively managed equity fund which will invest more than 65% of its assets in equity, and the rest in debt products.

The SID says that they are going to invest in securities that are trading at a discount to their intrinsic value, and that this scheme is only suitable for long term investors whose horizon for investing in stocks is at least 5 years.

I’ve seen at least a few reviews that in my opinion have gotten carried away with the description of this approach. You must appreciate that at the end of the day, every actively managed fund, and even small time investor like me is doing the same thing. No one goes in and buys something because they think it is overvalued,  everyone who is an investor (not a trader) is buying a share because they think that the company is worth more than what the share is trading for.

That in itself doesn’t make a great value investor.

Ultimately, valuation is opinion, and not a fact. Your view of intrinsic value may be significantly different from my view of intrinsic value, and then what matters is who is right.

Five years ago, I may have thought a certain company is a great company, and is severely undervalued, but today that share is just half of what it was 5 years ago, so what counts is how good am I in truly discovering undervalued stocks.

The same is true for a mutual fund as well, and what we need to see is how good is PPFAS in executing their strategy of finding undervalued stocks and investing in them.

I don’t think this can be done without a track record, and that’s the reason I started out by saying that the standard conclusion of waiting out before investing applies for this fund also.

I’d be remiss if I didn’t state that there are a lot of cool things about this fund like having a section on their website that actually discourages a certain type of investor from investing with them.

They are also quite frank with investors. Like this excerpt:

It is well known that to be successful in investing one must invest when others are fearful and divest when others are greedy. However, considering that PPFAS Long Term Value Fund is an open ended scheme, its ability to invest during bear markets will depend on your behaviour as investors. If investors desert us when prices are low, it will naturally constrain our ability to make invest when valuations are alluring.

I don’t think I have ever seen that before.

Or the fact that even the results for their PMS products are shared on their website (which has done well); this is not the norm as far as I know.

They have tutorials on behavioral finance on their website as well, which is quite rare.

All of these show good intentions, but unfortunately that alone is not enough, there is no way to tell whether these good intentions will translate into good performance or not, and that’s why I have to disappoint you with my standard conclusion of wait and watch for this fund also.

This post is from the Suggest a Topic page.

Motilal Oswal has come out with their first actively managed mutual fund and it’s called the MOSt Focused 25 Fund. It’s named this way because the fund will invest in up to 25 stocks at any given time.

What will Motilal Oswal MOSt Focused 25 Fund invest in?

This is an open ended equity fund, and they will invest 65 to 100 percent of their money in the top 200 biggest listed stocks. They have also said that they may invest up to 25% of their funds in stocks beyond the top 200 as long as the market capitalization of the company is more than Rs. 1,400 crores. They can also invest a portion of their assets in debt instruments.

I was curious to see how many companies fit this criteria and I looked at the S&P BSE 500 index to find that information. The 200th company in there is Supreme Industries with a market capitalization of about Rs. 4,000 crores, and then WELCORP is number 368 with a market capitalization of Rs. 1404 crores.

Now the S&P CNX 500 represents about 96% of the free float market capitalization of stocks listed on NSE, and this fund is able to invest in about 37o of them, so in that sense there is not really a whole lot of restriction in where it can invest. You can expect the bulk of the funds to be in large or mid cap stocks, but other than that the condition of the top 200 and then beyond that companies with more than Rs. 1,400 crores in market capitalization doesn’t narrow down the field in any significant manner as far as I can tell.

How do 25 shares compare with other big funds?

The next interesting thing to look at is the 25 number. If this active fund holds 25 stocks – how does that meaningfully differ from any other active fund which doesn’t impose such a restriction on itself.

Let’s take the example of HDFC Top 200 because it is successful, somewhat similar in structure to the extent that it can only choose companies from BSE 200, and is very big in size so that can give an indication on how many stocks huge funds need to own.

They have an Excel download with the portfolio of Top 200 as on March 31st 2013, and there you can see that this fund owns 69 stocks, so that’s way more than 25!

Also, you can see that the top 25 stocks form about 70% of their portfolio, and the last 44 constitute only about 28% of their portfolio (they have 2% cash) so that’s an interesting contrast that shows what they mean when they say focused.

I feel this is a good thing because all the stocks in their portfolio should be in a position to meaningfully impact their portfolio if they set an upper limit of 25. That in itself is no magic bullet though, and can backfire as well, but as far as strategies go, it appeals to me.

Who is the fund manager of Motilal Oswal MOSt Focused 25 Fund? 

There are two fund managers – Mr. Taher Badhsah who is responsible for the equity part, and Mr. Mr. Abhiroop Mukherjee who is responsible for the debt part.

I’m going to excerpt the information about Mr. Taher Badhsah from the offer document. 

Mr. Taher Badhsah is the Fund Manager of this Scheme and is responsible for managing investments in equity and equity related instruments of the Scheme. Taher is a B.E. in Electronics from the University of  Mumbai with a Masters in Management Studies (Finance) from the SP Jain Institute of Management, Mumbai. He has over 18 years of rich experience in fund management and investment research. He started his career as an automobiles analyst with Motilal Oswal and has been well-regarded in the industry for his work in this sector. Besides, Taher has also worked in different capacities with organizations like Kotak Mahindra and Prudential ICICI Asset Management Ltd.. He has spent the first 10 years of his career doing sell-side equity research and the past 8 years in active fund management. Taher has worked as a Senior Fund Manager for ICICI Prudential PMS for 3 years post which his last assignment has been with Kotak Mahindra Investment Advisors as a Fund Manager managing a part of their long-only offshore equity assets between 2007 and 2010. At Motilal Oswal AMC, in his capacity as Sr. Fund Manager and Co-Head Equities, he has led the active equity investment team since 2010. Mr. Taher Badshah is not a fund manager for any other schemes of Motilal Oswal Mutual Fund except Motilal Oswal MOSt Focused 25 Fund.

I’m unable to make any meaningful inference out of this, so I’ll leave it without further comment.

Expenses and Dates

The offer document says that the fees will be under the maximum permissible so I think it’s fair to assume that this is not going to be a low cost fund.

The NFO opened on 22 April 2013, and will close on May 06 2013.

Conclusion

Motilal is not the first to come up with the idea of 25 stocks but I do like the idea. However, there is no way to tell how an actively managed fund will perform without looking at the performance itself.

If you are in the market for an actively managed fund, I’d say it is better to invest in one that has already shown promise and keep this one in your watch-list to see how the fund does in a two or three year’s time.