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Funds for the long distance runner

Dhirendra Kumar

Closed-end funds have been out of favour for few years now, with most of the actively traded funds being wound up or being converted into an open-end fund. There were some key factors which eventually lead to a distaste for closed-end funds.

The principal reason was mis-selling - inappropriate selling of funds-- which created unrealistic expectations in the minds of investors that never got fulfilled. And most closed-end funds launched before the 1994 boom, which lasted till 1999, drove down the stock price of these funds at steep discounts significantly below their NAVs. With over supply of these funds, the stocks of these funds were under a sustained pressure of distress sale by investors. These are enough reasons to drive away investors from these funds.

With fund companies on the defensive with prevalent discount on their stocks, most of the large funds were converted into an open-end structure. In fact, all the big open-end equity funds today are converts. These include. Magnum Multiplier Scheme '90 (renamed as Magnum Equity Fund), Magnum Multiplier Plus, Mastergain, Masterplus, Mastergrowth, Grandmaster, Canbonus, Canexpo, Taurus Starshare and many others. With the conversion of these large funds, the arbitrage opportunity has virtually disappeared for the patient investor in a closed-end equity fund.

With this conversion its is unlikely that any closed-end fund will find takers in recent future. Closed-end listed fund are becoming a rare species and are likely to become extinct. The only closed-end fund being launched in recent times are the UTIs Monthly Income Plans, which finds takers for different reasons.

Still there are about 20 closed-end listed equity funds, though none of them are actively traded. The notable exceptions are Mastershare and Morgan Stanley Growth Fund which trade very actively and present a rare opportunity to build a core holding for substantial long-term capital appreciation.

The case for investing in these funds is too compelling today. These funds are ideally suited for long-term capital build-up. They have a defined term and are under no continuous pressure of inflows and redemption in the fund. Hence, these funds are expected to deliver above average returns. Consequently, investors can hope to get significantly higher yield from their investments for their stay till the end of the fund. However, these funds are suited only for a long-term investor as they are unlikely to deliver any meaningful return in the short-term.

Mastershare
Mastershare, the first Indian equity fund was originally launched in 1986 for seven-year term. It was extended for another term of 10 years once it came up for redemption in 1993. The fund till date has provided an uninterrupted annual dividend. Mastershare paid a dividend of 16 per cent in August 1998. The fund has also given three bonus and two rights.

Mastershare has an enviable track record of giving an annualised return of nearly 25 percent over its long history. Mastershare's performance is a proof for long-term investing in equities. Mastershare has been fully into equities during the three-frenzy bull phases and the interim troughs during its thirteen-year life span and has been able to outperform its benchmark in all market weathers. However, the huge size of the fund coupled with sluggish stock market performance has deterred the fund from keeping pace with its aggressive growth peers. Particularly in a year dominated by growth stocks, the fund has been a laggard. The low floating market capitalisation of software stocks has deterred the fund from participating in the infotech led rally.

Mastershare has also been transformed in the past one year, with significant consolidation of its portfolio. The fund which was wildly spread over 266 stocks, has now become so heavily concentrated in its top 15 stocks, that these account for 96% of the total assets. Mastershare is a truly bluechip portfolio, and the fund has replaced its significant PSU holding with leading pharmaceutical, FMCG and Infotech stocks.

The fund has a healthy NAV and a track record of paying 16 percent annual dividend. Despite the dividend tax of 10 percent, the fund is likely to sustain dividend at 16 percent. With the tax-break for open-end equity funds, Mastershare has a compelling reason to go open-end. Besides, with its impressive performance, there is unlikely to be a mass exodus from the fund - which could otherwise deter UTI from converting the fund into an open-end one.

Mastershare offers an excellent opportunity for investors with a medium-term perspective. Mastershare currently quotes at Rs 14 against an NAV of Rs 21.62 yielding, a 31% discount. For an investor who stays with the fund till its redemption in October 2003 will get a yield of 45%.

Morgan Stanley Growth Fund
Launched in 1994, the fund was able to raise Rs 980 crore against a target of Rs. 300 crore. Initially, the scramble for MSGF units was mainly because the fund was offered on a "first come first served" basis. And eventually all investors were allotted units. So the fund which commanded a significant premium even before listing immediately disappeared. Investor's expectation further tarnished with an unimpressive performance by the fund in a freely falling market.

The huge corpus raised at peak market levels became a significant deterrent to a focussed portfolio. Initially the fund was spread over 350 mid and small-cap stocks. At its low in December 1996, the fund's NAV was Rs 6.94. Consequently, the fund underwent a massive restructuring and substantial market buyback of its units.

The fund has been able to significantly reduce the number of stocks to 100 and further consolidate its position in key holdings, with its top 25 holdings accounting for 79% of net assets, which is heavily into Infotech, Pharma and FMCG stocks. This is leading to an improved performance from the fund. During the past one year, MSGF gained 47% against a negative 3.9% for the Sensex. However, the perception of the fund remains negative and the market price of the fund has remained unmoved. Today, the MSGF portfolio is poised to outperform the market over the long-term.

Morgan Stanley Growth Fund (MSGF) offers an excellent opportunity for investors with a long-term perspective. The MSGF units currently quote at Rs 14 against an NAV of Rs 19.02, a steep discount of 26%. For the long-term investor this will translate into a yield of 35%.

Bargain Funds - Top Holdings
Morgan Stanley (26/11/99)	Mastershare (30/9/99)
Infosys Technologies	Hindustan Lever
Zee Telefilms	ITC
Hero Honda Motors	Reliance Industries
TELCO	Infosys Technologies
BHEL	NIIT
Container Corpn.	Cipla
Tata Tea	Glaxo India
Cipla	Wockhardt
HDFC	Dr. Reddy's Laboratories
MRF	Hoechst Marion Roussel
Software Solutions	German Remedies
ITC	Wyeth Lederele
Larsen & Toubro	Novartis India
T V S-Suzuki	Rhone Poulenc (I)
Cummins India	Sun Pharmaceuticals

Mutual Funds

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