You can't teach an old monkey new tricks. -- Anonymous
The solution lies in teaching a new monkey old tricks. -- Personalfn
At Personalfn, we believe that most NFOs (new fund offers) are a case of new monkeys performing old tricks in an equally amusing manner. Despite the SEBI (Securities and Exchange Board of India) diktat that requires the Board of Trustees to 'certify' an NFO as new, we still find 'new monkeys performing old tricks.' We have analysed some of the NFOs launched in the recent past to determine if they have added any value to the investor's portfolio.
While selecting NFOs, we have employed some filters. To begin with, we have only selected equity NFOs since they attract maximum investor attention and net assets. To be fair to the NFOs under review, we have selected only those that have a track record of being 'fully invested' for at least 12 months.
Given that funds can take upto 6 months from launch for being fully invested, we have considered NFOs that have been in existence for at least 18 months. Of course many of these NFOs are still not necessarily fully invested, but at least they can be if they want to. Moreover, we only evaluated NFOs from leading fund houses (by net assets).
It will be apparent from the table (below) that many of these NFOs didn't really need to be launched. In many cases the themes (infrastructure, commodities, outsourcing to name a few) failed to add any significant value to the investor's portfolio.
In quite a few cases, it is evident that the fund house had another fund with a relatively similar investment style/positioning. It could have been much simpler if the fund house chose to talk about the existing fund, rather than launch another NFO.
It is apparent given the quality of NFOs, why Personalfn was not enthused enough into recommending them to clients. Of the NFOs listed above only two caught our attention viz. Franklin Smaller Companies (a 5-year close-ended equity fund investing in small caps) and HDFC Long Term Equity (a 5-year close-ended equity fund investing in companies across market capitalisations).
Being launched by well-managed fund houses, with a lock-in allowing the fund manager to invest for the long-term in opportunities that were being ignored by most fund houses (like small caps for instance) were some of the compelling reasons for recommending such NFOs.
In addition to the NFOs selectively mentioned in the table, there are scores of NFOs that have added little value to the investor.
If anything, they have added to the confusion, because the thought uppermost on the investor's mind is -- NFO A is so similar to Fund B from the same fund house, what value will NFO A offer that is not already being offered by Fund B?
And it is apparent from looking at the NFOs that most haven't achieved the level of performance that was expected of them. As we mentioned earlier, many were too niche to outperform a broad-based index like the BSE Sensex. So investors are left wondering if they weren't better off investing in the index (i.e. an index fund) or a well-diversified equity fund. Of course, 1-year is an abbreviated time frame for evaluating an equity fund (we prefer a minimum 3-year time frame for this), but at Personalfn we have noticed that most thematic funds underperform the index over longer time frames.
High on net assets, low on value
| Fund Name | Category | NFO Close | AUM (Rs bn) | Comments | 1-year (%) |
| Reliance Equity | Equity: Diversified | 7-Mar-06 | 45.0 | A large cap fund that hedges its portfolio in line with market levels. At higher market levels, a larger portion of its portfolio is hedged. A defensive investment strategy that does not allow the investor to generate returns beyond a point. Also in terms of stock picks, this fund is similar to Reliance Vision, a predominantly large cap equity fund. | 15.2 |
| SBI Bluechip | Equity: Diversified | 20-Jan-06 | 28.6 | A large cap fund quite similar to Magnum Equity in terms of stock picks. No different from the scores of other large cap funds. | 7.6 |
| Magnum Multicap | Equity: Diversified | 16-Sep-05 | 21.0 | As the name suggests, the fund can invest in both large caps and mid caps. Similar to Magnum Multiplier Plus in terms of stock picks. | 7.8 |
| HSBC Advantage India | Equity: Diversified | 27-Jan-06 | 16.0 | A thematic fund that will target a few themes and invest in them aggressively. Eventually, most thematic funds end up investing in more than one theme because they have such broad mandates, so the NFO did not really offer anything unique. | 7.2 |
| PruICICI Infrastructure | Equity: Infrastructure | 16-Aug-05 | 14.2 | Was launched to tap the infrastructure theme aggressively. However, one look at its broad, inclusive, investment mandate and one would think it is a diversified equity fund. | 28.8 |
| HDFC Long Term Equity | Equity: Diversified | 27-Jan-06 | 13.0 | A 5-year close-ended fund that can invest across market caps. It was close-ended since the fund wanted to take long-term bets which is difficult in an open-ended structure. Given the free-flowing investment style and process-driven investment approach, we recommended this fund to Personalfn clients. | 8.8 |
| Franklin Smaller Companies | Equity: Mid Caps | 14-Dec-05 | 12.0 | The fund was launched to target small caps, a first in the industry. One of the few innovative funds of its kind and one of the few NFOs recommended by Personalfn selectively to its clients. | 1.1 |
| Stanchart Classic Equity | Equity: Diversified | 14-Jul-05 | 11.7 | The first equity fund launched by Stanchart Mutual Fund anywhere in the world. But investors could not care less, they took to the fund like it was a veteran in the stock markets. After launching a string of equity NFOs, the fund house realised that mutual fund is not core business for it globally. | 12.4 |
| Magnum Comma | Equity: Diversified | 25-Jul-05 | 9.5 | Was initially pulled up by SEBI because it gave the impression that it would be investing in commodities; the fund was only targetting commodity stocks. Expectedly, the fund paid a heavy price for its narrow theme, especially during the crash in May 2006. | 8.4 |
| BSE Sensex | 15.6 |
With regards to NFOs, we have a clear action plan for investors -- avoid NFOs, instead opt for well-managed, existing funds from that category (of the NFO) with well-established track records over the long-term, especially during a market downturn.
However, if the NFO offers something that no existing fund in the industry does, then there is a case for considering it for investment. Or if an NFO from a well-managed, process-driven fund house, is open for a limited time period over which it will collect monies only upto a pre-determined ceiling (like DSP ML Micro Cap Fund), then again there is a case for evaluating it as a probable investment.
Barring these exceptions, we are of the view that an NFO must establish a track record over the long-term (at least 3 years for an equity-oriented fund) before meriting inclusion in the investor's portfolio.
By Personalfn.com, a financial planning initiative. It can be reached at info@personalfn.com. Personalfn.com also publishes a free-to-download financial planning guide, Money Simplified. To get a copy of the latest issue -- Real Estate & You - please click here.
