Alpha Ideas

(Had an interaction with the Fund Management Team of Motilal Oswal MOSt Focused 25 Fund.Am posting the same in the Q&A format-Raoji)

According to AMFI, investors have pulled out 15000 Crores from Equity MFs and ETFs in 2013.Is this a good time to launch an equity fund?

• In the last 5 years, Equity as an asset class has underperformed, while other asset classes such as Gold, Fixed income, Real Estate etc have performed better – leading to investor apathy towards equities.
• However, historically over a long term period Equities are one of the best performing asset classes.
• We believe the macro fundamentals are turning favourable for equities, while valuations remain reasonable. Typically, investments made during periods of low appetite in general are seen to have generated substantially higher returns for investors.
• As such, in our opinion, the NFO provides a good investment opportunity for investors with a medium to long term investment horizon.

Performance of various asset classes (5 Year CAGR)

 Data as on 31^st March, 2013.

 What is MOSt Focused 25 Fund all about?

Motilal Oswal MOSt Focused 25 Fund is a differentiated focused offering aimed at investors with medium to long term investment horizon.

Key features:

• A high conviction portfolio with maximum of 25 stocks.
• 65% to 100% of the portfolio will consist of large cap companies forming part of the top 200 companies by market capitalization.
• We can summarize the investment style as “QGL” (Quality, Growth with Longevity). Simply put, the fund will aim to buy great businesses, which have shown consistent growth over the years and are likely to remain in the business for many more years to come.
• The fund will practice “BUY AND HOLD” style of investing with significant allocations to few stocks of high quality which can be called Blue chips.
• The idea is to identify companies which have long term franchise value with significant growth potential. This style of investing typically has churn ratio significantly lower than the industry averages.
• This is a NO LOAD fund. There will be NO ENTRY/ EXIT LOAD in our fund. This is a great advantage for investors as 100% of the amount invested will be working for  them .For example, when you redeem Rs.1,00,000 worth of units from a No-load mutual fund, all of Rs. 1,00,000 will be credited into your bank account. Whereas, if you were to redeem the same amount in a load fund that charges a back-end load (exit load) of 3%, the amount you actually receive in your bank account after the exit load is only Rs. 97,000. Hence, a NO Load fund can save considerable amount for an investor in expenses.

How is this fund different from other funds in the market?

• The fund is amongst the very few in the market with a distinct focused approach to investing.
• It is also amongst the very few “Zero Load’ mutual fund schemes currently offered (Key differentiations explained above in details).

Why is the fund holdings restricted to a maximum of 25 stocks? Why not 35 or 50?

• The fund portfolio will be constructed based on high conviction ideas thereby achieving an optimal level of diversification.
• In our experience, dealing with limited number of businesses/stocks ensures greater due-diligence and better monitoring of portfolio positions by the fund manager.
• Research by Franco Modigliani reveals that a concentrated portfolio of 20-25 stocks lowers company specific risk to optimum levels.
• Further over-diversification often leads to addition of companies with relatively mediocre businesses, which dilutes fund performance.
• Motilal Oswal MOSt Focused 25 Fund will have maximum 25 stocks, each with Quality, Growth and Longevity (QGL) characteristics.

Since the fund subscribes to the Warren Buffet’s philosophy of “buy and hold”, would the fund hold stocks “forever” like Warren Buffett does?

• The fund aims to construct a low churn portfolio comprising of stocks with Quality, Growth and Longevity (QGL) characteristics.
• Any stock movements, in and out of the portfolio, will largely be driven by significant change in fundamentals of the stock over change in valuations

All stocks invested by the fund will have greater than 1400 Crores in Market Capitalization. Why use market capitalization as a criteria and why not enterprise valuation? Also, what is so special about the 1400 Crores figure?

• Rs.1,400 crores is the equivalent of US$250m at current exchange rates approximately. Besides, companies below Rs. 1,400 crores in market capitalization may not possess enough history and track record for the fund manager to take an informed decision about the business and its management.
• Enterprise valuation does not provide a uniform measure of comparison across sectors as the capital requirements and structure of various industries tends to be different. Also, Enterprise Valuation does not effectively convey the liquidity situation of a stock in the market.

This is the first actively managed fund from Motilal Oswal though it is well known for its PMS schemes. What are the PMS learnings that Motilal Oswal brings to the table?

• Generally, when a maiden NFO is launched by an AMC it is seen to be lacking track record. In this regard, Motilal Oswal AMC is uniquely positioned because of its lineage of 25 years of group experience in equity research and advisory and 17 years of Wealth Creation Studies which have shaped an exclusive investment philosophy.
• We believe this rich experience of equity research and investments spread over two decades puts in an advantageous position to manage an active equity fund.
• The superior performance of our PMS Funds, over the last decade, is largely on account of the focused investment philosophy followed by the firm.  Our QGL investment style has been effectively put to practice in our PMS business with good result. Since Inception our Value Strategy PMS Fund has delivered CAGR returns of 25.9% v/s Nifty returns of 18.8%, an out-performance of 7.1% (CAGR), while our NTDOP (Next Trillion Dollar Opportunity) Fund has outperformed Nifty by 11.6% since its inception (Dec’07). These strategies have also been able to outperform the markets over 2, 3 and 5-year periods.

Data as on 31^st March, 2013.

Inception Date: 24^th March, 2003.

Performance of NTDOP since Dec’07

Data as on 31^st March, 2013.

Inception Date: 11^th December, 2007.

The benchmark of the fund is CNX Nifty. Wouldn’t BSE 100 or BSE 200 be a better benchmark?

The CNX Nifty is one of the most well diversified Indices and hence widely used for benchmarking large cap/ multi cap fund portfolios. Given our planned fund composition, we believe CNX Nifty 50 would be the preferred benchmark for the fund.