Are MNC Funds likely to falter going forward?
Indian equity markets are no longer cheap. In fact, they have started looking overvalued now. Although markets are still finding new highs quite often these days, with every increase in the market indices, chances of a deeper correction are increasing. Under such a scenario normally, sectors such as pharmaceuticals and Fast Moving Consumer Goods (FMCGs) are perceived as defensive. Similarly, when the Indian rupee is under pressure, outsourcing and offshoring theme attracts investors. As an overlap of aforesaid investment preferences, even shares of Multinational Corporations (MNCs) are in demand. Furthermore, MNCs are also preferred as long term wealth creators due to certain unique advantages they bring in with them. MNCs are better known for their professional managements, good corporate governance and superior products. However, going by latest developments, it appears that, MNCs may fall out of favour with investors. So, as a result, MNC funds may not do well in foreseeable future.
Would good performance become history for MNC funds now?
Why MNCs may turn less attractive now...
You see, when markets started recovering from the shocks of global financial crises in 2009, MNC stocks listed in India started taking a lead over Indian stocks. MNCs not only outperformed broader markets, but also managed to beat many of plain diversified funds pushing MNC funds at the top of the chart then. Besides the widely known advantages for investing in MNCs, delisting plans caused a furor among investors. MNC stocks and mutual funds focused on MNC theme became hot favourite.
Data as on November 25, 2014
|Returns in (%)
|Birla SL MNC Fund (G)
|UTI MNC Fund (G)
|S&P BSE 200
|S&P BSE SENSEX
Returns over 1 year are compounded annualised
(Source: ACE MF PersonalFN Research)
As per a report in the Business Standard, dated November 06, 2013, from just 28 offers in 2009-10, the number of delisting offers went up to 46 in 2013-14. It was also believed that, many more offers could have been in the pipeline. However, some recent developments may now discourage MNCs from delisting their businesses. Stocks of many of such MNCs have already skyrocketed defying valuation concerns, purely on speculation of delisting. Now that, there may not be as many as open offers from MNCs as expected earlier, share price movement of many of them may come under pressure.
Main drivers for delisting businesses were...
What has changed now?
- Weak Indian rupee;
- Low to negative interest rates in the home countries; and
- Gloomy economic conditions
The Securities and Exchange Board of India (SEBI) amended SEBI (Delisting of Equity Shares) Regulations, 2009 on November 19, 2014. As per the amendments, delisting businesses is going to become a tough task for MNCs. New norms require MNCs to:
The PersonalFN is of the view that, the amended delisting norms may work in favour of minority shareholders who usually don't have much say at the time of delisting. Usually, it's a business between large institutional investors and the promoter's group. The norm of winging over tenders from at least 25% total public shareholding may make things difficult for companies at the time of delisting. This is especially true for the companies with large market capitalisation and larger base of shareholders. There could be some practical difficulties too while delisting companies. Companies with considerable non-promoter holdings may find it difficult to comply with the requirement of "acquiring shares from at least 25% of total shareholders" as retail investors may keep trading among themselves and the number of shareholders at the time of board approving the delisting plan could differ significantly when actual process begins. Moreover, the shortened deadline for completing the process may act as a barrier for companies.
- Buyback at least 90% of the total share capital
- Acquire shares from at least 25% of shareholders out of total public shareholding as on the day of the board meeting when delisting is approved (i.e. excluding the number of promoter shareholders)
- Complete process of delisting within 76 working days (reduced from 117 days allowed earlier)
- Should delist at the price at which 90% of shareholders including the promoters have tendered their shares under the process of reverse book building, wherever applicable
The way ahead...
PersonalFN believes number of open offers may dry out significantly, going forward. Out of factors driving delisting, only rupee is possibly the favourable factor even now. While, economic prospects seem to be improving, valuations have become extremely expensive for most of the potential delisting candidates. For these reasons, it is likely that, companies may not be interested in delisting their businesses in a hurry. Possibly even the interested companies may wait for valuations to come off before making an open offer.
PersonalFN believes investors investing in MNC funds may be better-off avoid investing in MNC funds now and instead prefer opportunities funds. Opportunities funds help you benefit from opportunities present in the market; yet they don't expose you to a heightened risk arising out of following a respective theme. PersonalFN has always believed that, investors should avoid sector and thematic funds as they require you to time entry and exit for yielding attractive returns. Timing the market successfully, every time, is near to impossible. Therefore, it is better to diversify across market capitalisation segments and sectors. Let your fund manager decide which company is attractive for you, rather than you speculating on the prospects of the company.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
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