In challenging times only a handful of companies manage to sustain growth because they continuously produce innovative process and systems that help them keep up with the changing times and become pioneers.
Considering the current turbulent times, there are such companies that can become pioneers that utilize new forms of production, technology, distribution or processes which are likely to challenge existing markets or value networks or displace established market leaders or bring in novel products and/or business models.
Kotak Mutual Fund is of the view that by investing in such companies can help in capital appreciation for over a long-term investment horizon. Fundamentally because pioneering companies are product innovators, process innovators, value innovators, reinvent distribution strategies/networks for business advantage, technology adopters and global innovators.
- Extend the Growth Profile & Longevity of Company.
- Improve Customer Stickiness
- Enhances the Moat – Strengthens Competitive Advantage.
- Be One Step into the Future – Wow the Market.
- Gravitating to Winner Takes All Markets
Hence the fund house launched Kotak Pioneer Fund that will invest in pioneering innovation theme for there is ample opportunity in the Universe in India:
- Dynamic Universe Presently of Around 120 Companies
- Cumulative Market Cap of Pioneer Universe – US $550bn, Approx. 30% Of Overall Indian Market Cap
- A Multi-cap-oriented Approach to Investing with Diversification across Sectors
- Access to Relatively New Economy Businesses
- Good Mix of Large, Mid and Small Caps in Universe
And KPF seeks to ride the megatrend of 4th industrialisation and the innovation boom that will create definite winners. Hence as per the current AMFI mandate, KPF will mainly aim to invest in a minimum 80% of its total assets in companies (domestic and global [35%]) having pioneering innovations theme within the prescribed limits.
Also, the scheme may take a smaller exposure to equity and equity-related securities of other companies other than having pioneering innovations theme, debt and money market Securities, and Units issued by REITs & InvITs.
But from a risk standpoint, given the portfolio allocation is skewed heavily to equity, KPF is a high-risk contender and thus suitable only for investors who have a high-to-very high-risk appetite and an investment horizon of at least 5 years.
Do note, a sector fund is a sub-category of equity mutual fund that invests in companies of one sector of the market. Sector funds are a very-high risk-very high return investment proposition, as the fortune of the fund is closely linked to the undercurrents of a specific sector, although it could invest across the market capitalization spectrum.
Table1: Details of KPF
|An open-ended equity scheme
|Thematic/Sector (investing in pioneering innovation theme.)
To generate capital appreciation from a diversified portfolio of equity, equity-related instruments and units of global mutual funds which invests into such companies that utilize new forms of production, technology, distribution or processes which are likely to challenge existing markets or value networks, or displace established market leaders, or bring in novel products and/or business models.
However, there can be no assurance that the investment objective of the Scheme will be realized.
|Rs 5,000 – and in multiples of Rs 1 for purchases and Rs. 0.01 for switches
|Rs 10 per unit
|Mr Harish Krishnan and Mr Arjun Khanna
|85% IISL KOTAK INDIA PIONEERING INNOVATIONS INDEX + 15% MSCI ACWI INFORMATION TECHNOLOGY INDEX TRI.
|October 9, 2019
|October 23, 2019
(Source: Scheme Information Document)
What is the Asset Allocation of Kotak Pioneer Fund?
The asset allocation under the Scheme, under normal circumstances, will be as follows:
Table 2: KPF’s Asset Allocation
|Equity and Equity Related Securities of companies having pioneering innovations theme*
|Equity and Equity Related Securities of companies other than having pioneering innovations theme
|Debt and Money Market Securities
|Low to Medium
|Units issued by REITs/ InvITs
|Medium to High
*The scheme may invest upto a maximum of 35% in units of overseas Mutual Funds schemes / ETFs with similar investment objective or strategy / Foreign securities# having pioneering innovation theme.
#The Scheme will invest up to a maximum of 35% of its net assets in foreign securities as specified in the SEBI circular- SEBI/IMD/CIR No.7/104753/07 dated September 26, 2007, and any subsequent amendments thereto specified by SEBI and/or RBI from time to time. The scheme may invest in GDRs/ADRs including overseas markets in GDRs/ ADRs, overseas equity, bonds and mutual funds and such other instruments as may be allowed under the Regulations from time to time.
(Source: Scheme Information Document)
What is the Investment Strategy of the Scheme?
To achieve the investment objective of the Kotak Pioneer Fund to generate capital appreciation from a diversified portfolio of equity, equity-related instruments and units of global mutual funds it will invest in companies that utilize new forms of production, technology, distribution or process which are likely to significantly challenge existing markets and value networks, and displace established market operators, products and/or business models.
Definition of Pioneering Innovations as a theme:
The underlying investment philosophy of Kotak Pioneer Fund would be to invest in such companies that have the potential to bring in sustained higher growth and change the competitive business environment due to their ability to:
- Produce a new thing (a new product/service) or
- A new way of making a thing (a New Process) or
- A new way of using a Thing (New consumer Value or behaviour)
- A new way of reaching out to customer either by disintermediating intermediaries or leveraging technology
- A technological innovation which results into a new or improved product or service to the consumer.
The fund seeks to invest in such companies that utilize technological and/or procedural ability to operate and create large value for customers, government, society by way of either time savings, cost savings, enable better engagement or make them more productive.
Such pioneering companies are typically uninhibited in utilizing new technologies within their field of operation; adapt new and audacious strategies; may be indifferent to their size vis-à-vis the competition, and many times would not even be classifiable as an operant in any particular sector or market cap segment. The business activity of such companies creates competitive advantage which proves to be difficult for the competitors to surmount, meet or replicate.
The pioneering companies can also utilize existing technologies and provide mundane services but their method or their product or their business model makes them a peculiar and potentially pioneering player within their business segment.
Thus, given India‘s status as a developing economy, the fund may spot early disruption cycle and a resultant investment opportunity, even in mundane sectors and businesses, which otherwise may be considered as sunset sectors in developed nations.
As an example, the domestic equity portfolio may invest in companies that are creating or utilizing patents, processes ,or products that will challenge the business of their competitors; and /or Or such companies that have developed a new process to manufacture an old molecule, metal, car, building, etc.
Likewise, KPF will consider such companies to be pioneering that will bring new technology/materials/processes that challenge the way the things are manufactured, or services are being rendered, or new ways are being found to delight the customers.
The scheme will also seek to invest in such companies that may be servicing or partnering or may be benefitting from such pioneering companies (as defined above), globally and/or in overseas mutual funds investing in such companies.
The fund would seek to invest in unlisted equities of companies as permitted from SEBI from time to time that is in line with the said theme and maybe operating to disrupt the competitive landscape of the Indian industry.
Through the mutual funds route, this fund will seek to invest in global funds that invest in companies inventing or utilizing innovative technologies such as, but not limited to, artificial intelligence, cloud computing, robotics, energy renewables, energy storage, advanced materials, 3D printing, autonomous and near-autonomous vehicles, internet of things, knowledge work automation, nanotechnology, advanced genomics, augmented reality, advanced energy exploration and distribution, mobile internet etc.
The portfolio construction will be based on thematic and a balanced approach between top-down and bottom-up stock picking using the Business, Management and valuation (BMV) model. The Fund Manager will evaluate the business environment that a company operates in, the capability of the management to execute and scale up the business and valuation of the company based on fundamentals like discounted cash flows and PE ratios, etc.
Who will manage the Kotak Pioneer Fund?
Mr Harish Krishnan will be the lead Fund Manager of the Kotak Pioneer Fund while Mr Arjun Khanna will be the Dedicated Fund Manager for investments in foreign securities.
Mr Harish Krishnan is the Sr. Vice president (Fund Manager) at Kotak Mahindra AMC. He is a Bachelor of Technology (Electronics & Communications) from Government Engineering College, Trichur, a Postgraduate in Management from Indian Institute of Management, Kozhikode and a Chartered Financial Analyst from the CFA Institute.
Mr Krishnan has 14 years of experience spread over Equity Research and Fund Management. Prior to joining Kotak Mahindra Mutual Fund, he was based out of Singapore and Dubai, managing Kotak’s offshore funds. He has also worked at Infosys Technologies Ltd in his earlier stint.
Currently, at the fund house, some of the funds which he manages include Kotak Infrastructure & Economic Reform Fund, Kotak Bluechip Fund, Kotak India Growth Fund Series 5, Kotak Balanced Advantage Fund and Kotak Equity Savings Fund.
Mr Arjun Khanna is a Bachelor of Engineering (Electronics) and has done his Master of Management (Finance) from Jamnalal Bajaj Institute of Management Studies, Mumbai. He has received the Chartered Financial Analyst designation from the CFA Institute.
Mr Khanna has over 11 years of experience out of which 10 years have been with Mutual Funds in Equity Research. Prior to joining Kotak Mahindra Mutual Fund, he was with Principal Mutual Funds. He has also worked at Citibank in his earlier stint.
Some of the schemes that he manages at the fund house include Kotak Infrastructure & Economic Reform Fund, Kotak Bluechip Fund, Kotak Equity Hybrid, Kotak Emerging Equity Scheme, Kotak Equity Savings Fund, Kotak Small Cap Fund, Kotak Standard Multicap Fund, Kotak Debt Hybrid Fund, Kotak Equity Opportunities Fund, Kotak Banking and PSU Debt Fund, Kotak Bond Short Term Plan, Kotak Bond Fund, Kotak Corporate Bond Fund, Kotak Dynamic Bond Fund, Kotak Money Market Scheme, Kotak Credit Risk Fund, Kotak Mahindra Liquid Scheme, Kotak Low Duration Fund, Kotak Medium Term Fund, Kotak Savings Fund, Kotak Mahindra Gilt Unit Scheme 98 – Investment Plan Kotak Global Emerging Market Fund, Kotak Global Emerging Market Fund, Kotak US Equity Fund, Kotak World Gold Fund, Kotak Asset Allocator Fund, and Kotak Balanced Advantage Fund.
The outlook for Kotak Pioneer Fund:
In an endeavour to achieve the stated objective of the scheme, KPF will predominantly invest in companies which are continuously using innovative techniques and processes to keep up with the changing economic environment and grow.
The primary aim is to tap potential gains through active management of the fund for the long term with adequate risk mitigation strategies used.:
- Risk Control Measures for investment strategy:
The fund will comply with the prescribed SEBI limits on exposure. Risk is monitored and necessary action would be taken on the portfolio if required. Attribution analysis is done to monitor the under or over performance vis a vis the benchmark and the reasons for the same.
- Risk Mitigation measures for portfolio volatility:
The overall volatility of the portfolio would be maintained in line with the objective of the scheme. The portfolio would be adequately diversified across stocks within the broad theme to mitigate volatility. Volatility would be monitored on with respect to the benchmark and peer set.
- Risk mitigation measures for managing liquidity:
The fund manager may keep some portion of the portfolio in debt and money market instruments and/or cash within the specified asset allocation framework for the purpose of meeting redemptions. The liquidity would be monitored and necessary action would be taken on the portfolio if required. Stock turnover is monitored at regular intervals.
But the fortune of the fund is closely linked to the companies selected by the fund manager and his team. The construction of the portfolio would be a challenge, as the investment theme is diversified across sectors, stocks and across geographies (35% allocation out of the total minimum 80% allocation to equity and equity-related securities of companies having pioneering innovations theme) as well.
In a current global and domestic slowdown, the valuations don’t justify the company earnings of Indian companies. And on the global front there is a wave of Trump policies, US-China Trade War, upcoming presidential elections and going forward even India’s relation with the US and rest of the world and delay in Brexit could weigh on the overall performance of the equity markets.
Besides, “Pioneering Innovations” focused approach typically has high representation to emerging technologies and correspondingly lower representation to companies that operate in old economy sectors like metals, thermal power, corporate banking, traditional FMCG, traditional IT Services, etc. Phases where such sectors benefit (either due to massive risk-off or significant change in government policy to revive sectors like metals, thermal power, PSU banks etc) may witness under-performance for such an approach.
So, there is extreme high risk involved, despite the good opportunities available for long-term growth. Hence do consider the implications involved before investing in the Kotak Pioneer Fund as it is placed at the higher end of the risk-return spectrum.
Hence invest in a sectoral fund only if you:
- Have an extremely high-risk appetite
- Can stay invested for 7-10 years without getting perturbed
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