Motilal Oswal Multicap 35 Fund Review: Conviction risk cuts both ways!

This is a review of Motilal Oswal Multicap 35 Fund. This is a multicap fund that seeks to invest in no more than 35 stocks across market cap and sectors. Thanks to its distributor friendly approach and transfer from its PMS arm, the AUM of this less-than-five year old has quickly swelled to 13,000 plus crores. About 39% of it is in the direct plan (Source AMFI). Let us a take a closer look, not only at Motilal Oswal Multicap 35 Fund, but also the approach of the AMC and its investors.

To be frank, I think Motilal Oswal AMC has a rather brash, bravado-ridden approach to pushing its fund. It has to quickly mature in order to retain AUM, because its investors will not. Have a look at the scheme presentation for this fund.

The impression created – whether knowingly or unknowingly – is that the AMC can pick the “right stocks” and once it does (buying right) it will hold (sit tight). I have seen no other AMC stress so much on the “right stocks” with past returns prominently displayed.

They keep talking about “high conviction” picks and the need to keep the number of stocks in the portfolio low. This means that they would take (relatively) concentrated bets on business that have not yet taken off, but are expected to.

There is nothing wrong with this approach. The trouble is that investors much recognise that buying right is not possible all the time and we will know if we are right or wrong in hindsight. When you take concentrated bets and they go wrong, you will have to exit and start all over again. In the meanwhile the NAV of the fund will take a hit.  Neither the AMC or its distributors will highlight this possibility to investors – most of whom are young and immature.

Motilal Oswal Multicap 35 Fund: SIP Performance since inception

Look at that huge fall (aka draw down). Again, this is expected from Multicap 35, but cannot expect investors to be prepared.

Motilal Oswal Multicap 35 Fund: Nifty Next 50 and Nifty 100

Motilal Oswal Multicap 35 Fund  is benchmarked to Nifty 500, but I think NIfty Next is an appropriate benchmark. The fund has comfortably beat both since inception. However, there is practically no downside protection. The max drawdown for Nifty 500 during this period is 20% and that for the fund is only 1% less. Nifty NExt 50 has a drawdown of -21%.

If we look at the last three-year returns at the funds Morningstar page, the fund 2% more than BSE 500 although so did the category average. My point is that investors should be mentally prepared for this.

Fingerprint analysis

Here use the Fingerprinting visual Tool for Analyzing Mutual Fund Performance and compare monthly mutual fund and index returns and find out where they fall.

Motilal Oswal Multicap 35 Fund vs NIfty 500 TRI

You can see from the above why investors can get worried while holding this fund. The underperformance months on the higher side. We can check the dates when these occur.

The underperformance is frequent (although not just for this fund).

Motilal Oswal Multicap 35 Fund vs NIfty Next 50 TRI

Again that is decent performance.

Summary

I don’t think there is anything wrong with fund. It is just doing what it say will do. It is the investors mistake to expect this fund to “fall less” than the market. That is not its mandate. As mentioned above, when the fund management restricts the no of stocks it can choose and seeks outperformance based on conviction and concentration things can go wrong.

One can sit right only when one buys right and this cannot happen all the time. SInce some loyal distributor is likely to tag Aashish P Sommaiyaa on twitter to this post, my insignificant two cents to the amc is (1) tone down expectation from all such “focused” funds others the AUM will not “stick” (2) educate investors about the importance of patience.

Investors cannot buy a fund expecting only returns. This is a high-risk, potential high-reward and requires a significant time to perform. So do not choose this unless your needs are over 10 years away. The AMC says it will

 endeavour to construct such a portfolio that the product is best suited for medium and long term investment

Please interpret medium term as 10 years.

New investors: If you do not mind a rough ride, then you can consider this fund although IMO you should not. When the going in the markets is good, people talk about how patience is important. When returns evaporate for a few months, then tune changes. Equity may work in the long term but the journey matters.

Existing investors: If you are worried about the fund performance then you should first worry about your investment strategy or the lack thereof. The fund is behaving as it should. You have two choices: either be patient or choose a less volatile fund.

 if you want the rainbow, you gotta put up with the rain. – Dolly Parton