Morgan Stanley Growth Fund: Hold

Recommendation: Hold

Aarati Krishnan

DESPITE the fairly sharp setback to its net asset value (NAV) over the past six months, investors in the Morgan Stanley Growth Fund can hold on to their investments in the fund for now. The fund is close-ended and the only exit option is through the secondary market. With the units trading at Rs 10.60 per unit, the market price carries a discount of 22 per cent to the fund's latest NAV of Rs 13.37 per unit.

This discount historically narrows when the fund's NAV picks up, as happened in the first quarter of 2000. Fresh investments in the fund need not be contemplated given the lack of liquidity at NAV-related prices.

Suitability: Investors wishing to enter a diversified fund now may be better off investing in an open-end, small or mid-sized equity fund with a focussed strategy, which may be better able to capitalise on a market uptrend.

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Performance review: From the peak of February 11, 2000 (NAV Rs 23.92 per unit), the NAV of Morgan Stanley Growth Fund suffered an erosion of around 41 per cent (after factoring in dividends). This is higher than the value erosion suffered by broad market indices such as the S&P CNX 500 and the BSE 200 over this period.

During this period, the fund underperformed such diversified funds as Kothari Pioneer Bluechip Fund, Alliance Equity Fund and Zurich India Equity Fund. On the other hand, it more or less matched the performance of Prudential ICICI Growth Fund, K-30 and Sundaram Growth Fund.

The relatively low exposure to technology stocks and the low concentration in this fund's portfolio explain the fund's underperformance relative to some of its peers, such as Kothari Pioneer Bluechip or the Alliance Equity Fund.

With a net asset size of around Rs 850 crore by end September, Morgan Stanley Growth Fund remains among the largest equity funds in the private sector. The fund is highly diversified both in sectoral and stock-specific exposures. Around 53 per cent of net assets were invested in technology/media/ telecom stocks as of March, but exposures were reduced to several of the technology stocks in the March-September period.

Exposures in Zee Telefilms, SSI, Subex Systems, Hughes Software and Visualsoft were pared over the last six months. Exposure to technology/media/telecom stocks was down to around 33 per cent of net assets by September. Infosys Technologies, at 22.3 per cent of net assets, accounted for the major proportion of this exposure. The other large sectoral weightages of the fund are in automobile, FMCG and pharmaceutical stocks. The low exposure to technology stocks has prevented the fund from taking advantage of the recovery in some of these stocks over the past month.

By end-September, MSGF continued to hold over 100 stocks in its equity portfolio. The presence of such a large number of stocks in the portfolio could prevent the fund from capitalising fully on good performance by one or two holdings. A focussed smaller fund could benefit more from good performance by a few of the top holdings.

In fact, the degree of concentration in the top holdings, which was deliberately enhanced over the past couple of years, has shrunk in the six months to September. While the top 25 holdings accounted for 84 per cent of the net assets in March, they accounted for just 67 per cent of assets by September.