While reviewing the Motilal Oswal Multicap 35 Fund I noticed some peculiarities in its portfolio which led me to dig further. This short writeup here is the compiled summary of my notes and observations. It should not be construed as a fund buy/sell recommendation. Before we begin, little background about the fund. This fund has an AUM of about Rs.13,000 crore as on 30-Nov-2018 and is the biggest from the Motilal Oswal stable. It was launched in Apr-2014 and has witnessed good growth over last few years.
We see that the fund had gained traction especially during the periods when the equity market was also doing well. This note is not about performance review. I will not be comparing Multicap funds from other AMCs or this fund vs benchmark or any such thing. Rather to enquire if AMCs walk the talk. How? Let us see.
All AMCs preach buying equity funds for long termand their marketing material and communication hanker on the phrase “long term”. Motilal Oswal Mutual Fund is no different. See this:
Is this really the case? Let us see the portfolio construct in detail and see whether the fund follows what it preaches. This fund had 29 stocks as of 30-Nov-2018. I noticed excessive transactions in some of the stocks. Here is the slice of transactions the fund made over the last 12 months on those 11 stocks:
Summary of last 12-month transactions:
How to read:
Alkem Lab – This scheme was holding 11.90 lakh shares on Nov-2017. Over the next 12 months, the fund made 4 buy transactions (bought 4.72 lakh shares) and 5 sell transactions (sold 11.52 lakh shares) resulting in overall decrease of 6.79 lakh shares. The fund held 5.11 lakh shares on Nov-2018.
Ashok Leyland – The fund had no holding on Nov-17 but bought for 3 months from Mar to May. Then sold in June. Bought again for next 3 months from Jul to Sep. Then sold again in Oct and Nov-18. So, in period of 9 months, it has 6 buy transactions and 3 sell transactions. And so on for other stocks.
Well, these examples above do not seem to reflect the “Buy Right Sit Tight” strategy which the company seems to be employing to realize the “full growth potential of the stocks”. I understand that I am not looking at the total portfolio but just a slice of it. And this slice represents roughly a third of the total AUM; which is substantial for a fund of this size. For whatever reasons the fund managers are churning the portfolio, it certainly does not look to be a buy and hold strategy. This churn is different from the traditional Portfolio Turnover that investors are aware of. Here, since a stock is never fully exited, the portfolio turnover ratios reported by the fund and/or popular investing websites will be very little.
Now comes the most ubiquitous question, just like the Maruti advertisement – Kitna deti hai? Well, as I mentioned in the beginning, this write-up is not about returns but following the processes. Can we rephrase the question – is this churn good for investor? Well, the short answer is – It depends. First off, what was the mandate of the fund vis-à-vis how is it doing now? I agree, the fund manager needs certain leeway/freedom to deploy its funds efficiently and work at maximizing returns. However, if the fund sways too much away from its mandate then it is a matter of concern. Second, what kind of strategy did the investor sign up versus what is the fund’s investment style – Value, Growth, Momentum, Dartboard or something else. If those two are not aligned then it can be a cause of heartburn as expectations and reality would not match. Third and perhaps most important – so long the fund seems to be doing decently well, most investors don’t really ask or care for questions like these. This is especially true in a bull market where every fund worth its salt gives decent returns. What one should be really concerned is – can your fund sustain when the tides turn.
If the answer to the above conditions is yes, then why not – every strategy under the sun is good to make money. If not, then I guess it is time to go back to drawing board and review the investment decisions and take corrective measures, if required.