Mutual Funds: Is the Morgan Stanley Growth Fund Growing?

MUTUAL FUNDS
Is the Morgan Stanley Growth Fund Growing?

Well, the mutual fund is, by restructuring its portfolio, reporting profits. But it still trades below par.

By Dilip Maitra

Vinod Sethi First, there were those snaking queues. Then, there was disappointment, 4 long years of it. And now, there's the faintest glimmer of hope. No wonder the 12 lakh unit-holders of Morgan Stanley Growth Fund (MSGF)--the Rs 761-crore closed-end mutual fund--are rubbing their eyes in disbelief.

Is it for real? Well, yes. But don't count your units--yet. For only the second time since its launch in June, 1994, MSGF has earned a surplus from its operations, recorded in the 9 months ended January, 1999.

The good news came after a gap of 5 years: the fund recorded an insignificant surplus of Rs 3 crore in 1994. Moreover, according to the Delhi-based Value Research, MSGF's Net Asset Value (NAV) has also crossed the Rs 10-rubicon--for only the third time in the last 5 years--to touch Rs 11.28 on February 5, 1999. While the fund's negative reserves of Rs 165 crore have come down to Rs 22 crore, in all probability, MSGF will end 1998-99 with positive reserves.

In fact, MSGF compares well with its peers now. According to Value Research, the fund ranked No. 2 in 3-year NAV growth among 22 closed-end funds; No. 4 in 1-year NAV growth among 31 funds; and outperformed the stockmarkets too. While its NAV grew by 20 per cent in 1998, the BSE 200 lost 10 per cent of its value over the same period. Adds Vinod Sethi, 38, Portfolio Manager, MSGF, in his January, 1999, letter to unit-holders: "Last year is likely to go down in history as one of the most difficult for the Indian stockmarkets."

Actually, the turnaround is the result of a 2-year effort to restructure MGMF's portfolio. In 1994, MSGF received Rs 900 crore from eager investors. The money was invested in a large number of mid-cap companies spread over 54 industries. A sample: Modi Alkalies, Pennar Aluminium, and UB (10 lakh shares each); Ballarpur Industries (6.38 lakh shares); and National Organics & Chemicals India (5.29 lakh shares). Since many of the mid-caps were going cheap, the fund was optimistic about them. But the stockmarkets weren't, and the mid-caps were the hardest hit.

Over the last 3 years, the fund has got out of a heap of small stocks at a loss of Rs 252 crore. Simultaneously, MSGF reshuffled its portfolio. "The fund's portfolio now reflects stocks that have the competitive edge to be successful in the long run," says a spokesperson for Morgan Stanley. To gauge the extent of the changeover, consider a quick comparison between 1994-95 and 1997-98:

Earlier, MSGF held shares in companies spread over 54 industries. In 1997-98, this was reduced to 23.

The top 10 industries in 1994-95 accounted for 54 per cent of the total investment. In 1997-98, it was 90 per cent.

In 1994-95, MSGF invested in 300-odd companies. In 1997-98, 100 stocks represent 97 per cent of its total portfolio investment.

Of the top 25 companies in MSGF's portfolio on January 1, 1999--accounting for 79 per cent of its investments--5 are from the software sector, 7 in pharma, 5 in engineering, and 3 are consumer goods companies. In 1994-95, the fund's presence in software and pharma was insignificant. Of course, the fewer companies in its portfolio have allowed efficient portfolio-management. But there is work to be done: MSGF still holds large stocks of relatively poor-performing companies like Bharat Heavy Electricals.

To improve the NAV, MSGF has also been actively buying its own units, which have been quoting at a discount of 30 to 40 per cent to their face value. This has reduced its unit capital by Rs 149 crore--from Rs 911 crore in 1994-95 to Rs 761 crore on January 1, 1999--which is 14.90 crore units. This has helped the fund in 2 ways: since the repurchases have always been below the NAV, the surplus is added back to the reserves. And, thanks to a smaller denominator, the NAV has been going up.

Says Dhirendra Kumar, 29, CEO, Value Research: "Buying units of your own fund can be a very useful strategy to boost your NAV. But the primary objective of a mutual fund is to invest money in other securities." Counters the Morgan Stanley spokesperson: "We did not buy back any units in 1996-97 as all the cash raised was used for portfolio restructuring. However, in 1997-98, with most of the restructuring complete, there was cash available to repurchase our units."

Currently at 41 per cent, expect the discount to the NAV to continue. With a unit capital of Rs 761 crore, there is a huge amount of floating stock in the market. Moreover, as MSGF is a closed-end fund--it will be redeemed in February, 2009, at the prevailing NAV--it does not declare dividends nor does it repurchase its units from unit-holders. Which means that unit-holders will have to wait 11 long years to redeem their holding.

Even though the buzz is that MSGF will go open-ended--in other words, it will repurchase units at an NAV-linked price--there is little chance of this happening in the short-term. Adds the Morgan Stanley spokesperson: "There is no intention to make the fund open-ended." After all, the massive redemption pressure may make its corpus disappear overnight. So, investors will just have to be patient--and pray that Morgan Stanley continues its profitable growth run.

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