MNC Funds: High quality, but hold for a minimum of 5 years to offset risks

This theme can underperform during strong rallies in domestic markets

MNC funds have struggled over the past year. The category declined by 5.1 per cent, compared with a 2.2 per cent gain in flexicap funds, over the past year. Despite this, Nippon India Mutual Fund has launched a new fund offer (NFO) for its MNC (multinational corporation) Fund, aiming to tap the long-term growth potential of the category.

 

“Thematic funds can display some divergence vis-à-vis the broader market in certain market phases. In the past one year, banking and financial services significantly outperformed the broader markets while themes like industrials, FMCG and consumer discretionary, which form a high percentage of MNC funds’ portfolios, lagged,” says Sailesh Raj Bhan, chief investment officer – equity investments, Nippon India Mutual Fund. 

MNC funds invest a minimum of 80 per cent in companies with cross-border business interests, assets or operations. The Nifty MNC Index tracks 30 firms that have at least 50 per cent foreign promoter holding. Currently, eight MNC funds manage ₹17,563 crore in assets.

 

High quality, diversified exposure

 

MNC funds hold stocks with strong fundamentals. “MNCs tend to have strong cash flows and efficient capital structures. They focus on profitability, resulting in reasonably high margins and return on invested capital (RoIC). The parent companies often have a wide product portfolio or technology solutions,” says Karthikraj Lakshmanan, fund manager, UTI Asset Management Company.

 

These funds span a range of sectors: FMCG, capital goods, auto, metals and mining, healthcare, information technology, and chemicals. “MNC funds, though in the thematic category, are diversified across most sectors barring financials, and are market-cap agnostic with good representation of large, mid and smallcap companies, thus providing good overall exposure,” says Lakshmanan.

 

Long-term compounders

 

Despite recent underperformance, MNC funds have delivered over longer time frames. Over three and five years, the category returned 13.1 per cent and 15.8 per cent category average returns, respectively.

 

“MNCs have been consistent compounders over a long period. This theme needs to be looked at with a long-term wealth creation perspective,” says Bhan.

 

“When markets perform extremely well, the MNC category tends to relatively underperform, though absolute performance is still healthy, as has been the case in the past five years since the pandemic,” says Lakshmanan.

 

Government push

 

Government initiatives could boost the prospects of MNCs. “India’s current growth trajectory could be a strong driver for MNC companies’ growth potential,” says Ravi Kumar T V, founder, Gaining Ground Investment.

 

MNCs could benefit from India’s growing focus on manufacturing. “Initiatives like Make in India and PLI schemes can aid in making India a factory to the world. The MNC space can be an important contributor as well as a beneficiary of India’s growth possibilities across manufacturing, consumption and innovation,” says Bhan.

 

Valuation premium

 

MNC stocks often trade at higher valuations. “With strong balance sheets and high cash flows, they are bound to be expensive when measured on parameters such as price-to-earnings (PE) and enterprise value to earnings before interest, taxes, depreciation and amortisation (EV/EBITDA). However, there are good investment opportunities in the space, as cash flows, growth and volatility need to be measured for the current price,” says Lakshmanan.

 

Investors should be prepared for periods of underperformance. “These funds come with global risks and may experience slower performance during strong bull markets in India,” says Kumar.

 

Allocation strategy

 

MNC funds work best as satellite holdings. “Conservative investors can have 5 per cent exposure to these funds, while experienced investors can consider 10 per cent. Ideally, one should invest for a five-year holding period,” says Kumar. 

MNC Funds: Strong performance over five years

  Period Category average (%) 1-year -5.7 3-year 13 5-year 15.8 10-year 10.2

Returns are of direct plans.

  Source: PBCS.in