The Indian investor was a trusting creature in the early years of liberalisation. Promoters with zero track records launched absurd IPOs, took the money and vanished. Thankfully, not every investment proved a disaster. In January 1994, a foreign financial institution launched a diversified equity fund with terms that should, in retrospect, have left investors ducking for cover. Morgan Stanley was then an unknown brand in India; it asked for a lock-in of 15 years and it made no promises.
The Morgan Stanley Growth Fund (MSGF) is the only fund managed by MS. It has determinedly ignored the fashion of converting closed-ended funds into open-ended schemes and is one of the survivors from the early liberalisation era.
In its high-profile launch, MSGF raised Rs 981.80 crore from about 14.5 lakh investors. Now, about 26 months before it’s due for redemption, we could call it a qualified success. Those who’ve kept the faith since 1994 have received an annualised return of 16.3% inclusive of dividends. You could characterise this performance as “middling”.
MSGF listed its units on the exchanges to provide liquidity. The market price has always been at significant discount to net asset value (NAV). For several years, the market price remained almost 30% below NAV. In May 1999, units were trading at 47.9% below NAV and currently the discount is 13-14% (see: Market performance). Though the discount has narrowed, there is still scope for arbitrage.
MSGF exploited the discount in a massive buy-back operation that mopped up 23% of corpus, reducing assets under management to Rs 721 crore. This pumped up NAV as well.
If you invested Rs 1,000 in MSGF you would now have about Rs 6,950, inclusive of dividends (See: Dividend History). On 16 November 2006, over one, three and five years, MSGF had returns of 51.3%, 42.3% and 39.3% respectively. Compare that to 51.2%, 39.3% and 35.6% from its benchmark, the BSE 100. The outperformance is decent but not extraordinary.
Large-cap open-ended funds like Franklin India Bluechip and HDFC Top 200 have consistently outperformed MSGF (see: Returns). Sridhar Sivaram, fund manager, MSGF attributes underperformance to sheer size. Says Sivaram: “We collected a huge corpus at inception. Managing a big corpus is a challenge. Most open-ended funds began with smaller corpuses.”
The objective remains to invest in growth stocks. Says Sivaram: “We select stocks with a long-term visibility of sustainable growth.” Initially the portfolio was overdiversified with over 300 stock holdings. Sivaram says: “Sebi regulations demanded that we deploy the corpus in a specified time and markets were much less liquid in 1994. As a result, we had to invest in a large number of stocks.”
Initially there were large exposures to Bhel, Tata Motors and SBI. Interestingly, at one point, MSGF held 13.9% in UTI Mastergain 92. Over time, focus has narrowed to around 50 stocks. The major exposures are in engineering, financial services and IT. Bhel remains the top holding (see: Portfolio) and there was a profitable early-bird investment in HDFC Bank. The large-cap bias means stability and 15% mid-cap exposure has been a boost. Himatsingka Seide, Emco and Jyoti Structures are among the favourite mid-caps.
Dhirendra Kumar of Value Research says: “Although not a blockbuster, MSGF is a consistent performer and holds quality stocks. Existing investors should hold.”
With just two years to redemption, MSGF trades at 13.9% discount to NAV. Does that offer an opportunity? If we assume the longterm return of 16% will be maintained, the discount will push real returns up close to 24%.
Sivaram himself points out the play on the discount: “MSGF offers a unique opportunity. Investors can buy at a discount and hold till maturity. As the fund nears maturity the discount will narrow and returns will rise to the tune of the discount.”
Of course, equity is risky and calculations would go awry if the markets tank. But that holds true for any equity fund and buying at a discount is better than buying at a premium in terms of loads.