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S. Vaidya Nathan

INVESTORS in the K-MNC Fund (of Kotak Mahindra Mutual Fund) can stay with the fund as the portfolio has room for upside. MNC stocks across sectors have come back into fancy after a protracted period of sluggishness.

This is especially true for pharmaceutical and engineering stocks. The fund is now top heavy with pharmaceutical MNCs whose valuation levels could improve as the patent regime is set to change in their favour in about 18 months time.

The fund's performance has not been impressive. Since launch, it has lost about 5.3 per cent per annum. This is better than the declines in the broad market indices. But quite a few diversified funds have done much better during this period. K-MNC is also essentially a diversified play within the universe of MNC stocks.

The modest performance is due to the lower valuation levels accorded to FMCG and pharmaceutical stocks. In the 2000-2002 period, MNC pharma stocks significantly under-performed the broad market as well as peer Indian pharma stocks. Only in 2003 did this trend change. Much of the returns in the last year — of about 5.6 per cent — are a consequence of the re-rating in the last five months.

Suitability: No longer do MNC stocks command the weight of good `defensive' investment options. So the fund has to be viewed as any other diversified fund. The risks are higher than investing in the typical diversified fund due to the restriction of the investment universe. The portfolio has been managed aggressively.

Investors without any significant exposure to MNC stocks directly or through funds can consider investing in K-MNC.

But returns from this set of stocks may not be attractive enough to be held in isolation. Also, direct exposures to select pharma stocks may be a better option now.

Investors ought not to adopt a buy-and-hold approach and should use any uptrend of 15-20 per cent to move out of the fund.

Portfolio status: K-MNC is heavily into pharmaceutical stocks. These now account for close to 40 per cent of net assets.

The likes of Pfizer, Aventis, GlaxoSmithKline Pharma and Novartis form the core of the pharma portfolio. Cash and cash equivalents at 10 per cent also appear to be on the higher side.

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