The Nippon India Innovation Fund is focused on choosing businesses which will gain market share over the next 10-15 years, according to Chief Investment Officer Sailesh Raj Bhan.
Earlier innovation was happening abroad and not in India, but that has changed now, Bhan told BQ Prime's Niraj Shah on The Mutual Fund Show.
"Innovation is starting to happen because tons of private capital has gone into it in the last 10-15 years. Large companies themselves are innovating to win or being ready for the change which is happening," he said.
The new fund offer is designed to "create portfolios which capture the changing landscape in India in terms of people doing investment in R&D and new business models, which can disrupt the existing large leaders in the marketplace", he said.
Long-Term Horizon
According to Gurmeet Singh, head of wealth management at DiVitas Capital Pvt., through this fund, Nippon is letting investors participate in exciting new opportunities of innovation-driven forward-looking businesses.
"What is on offer here is basically trying to encompass the various kinds of innovations, be it a product innovation, business innovation, or a process innovation," he said.
Investors in these funds should consider a longer-term horizon as the investment goes into the company's future where adoption of technology, building scale, and gaining meaningful market share takes time, he said. Such investments "should be a part of their satellite portfolio rather than being a part of their core portfolio", Singh said.
Segments In Focus
According to Bhan, a lot of new-age listed companies have access to capital and have created market share that is growing much faster than average revenue growth in India and gaining profitability quicker than expected.
Other segments that the fund intends to focus on are multinational companies, unlisted new-age companies like those involved in electric vehicle and energy transition space, and select pharma businesses which have built global capabilities on the specialty side.
Thematic Fund
Bhan said the fund will be diversified "to the extent possible" and may have between 40 to 50 stocks in terms of distribution.
"It will not be as diversified as an equity diversified fund and hence, we are positioning it and marketing it as a thematic product. So, it does have a different risk profile than a pure diversified equity fund," he said.
Singh said thematic funds bring in a good choice if an investor is bullish on the theme and intends to capture the gains that a particular sector may deliver.
"Whether that is healthcare or IT or innovations, which are like differentiated themes and may be underrepresented in the index. So, those are the themes that one must consider in a thematic fund as long as it matches with the risk appetite and their objectives," he said.
Watch the full video here:
Edited Excerpts From The Interview:
Let’s hear a slice of the conversation that I had earlier with Sailesh Raj Bhan of Nippon AMC, he is the CIO, and I began by asking him about this NFO and what kind of investors would it be most suited for?
Sailesh Raj Bhan: Nippon India Innovation Fund is focused on choosing the kinds of businesses which will gain market share and will possibly have the right to win in the next 10-15 years.
Why this is important is what's happened in India in the last 10 years or in the last 15 years has been a significant part of that has been coming from the innovation not happening in India but happening abroad. So, you have got winners where companies which were global leaders in technology and all that and now you are finding that innovation is starting to happen because tons of private capital has gone into in the last 10-15 years.
Large companies themselves are innovating to win or being ready for the change which is happening. I think what happened in Nasdaq say in the last 20 years has clearly been the case of a different set of businesses winning a lot more market share and a lot more market cap effectively. We think a different set of businesses in India in the next 10-15 years will win that.
So, this fund is to create portfolios which capture the changing landscape in India in terms of people doing investment in R&D, people doing investment in ahead of time creating new business models, which can disrupt the existing large leaders in the marketplace, and I think that is what this space intends to capture.
It's interesting because we see large companies doing innovation, we see startups doing innovation as well, so in some sense, you will have the whole bucket to choose from?
Sailesh Raj Bhan: Interestingly, the spread will be across market caps and given that we are looking at companies who have in a way established the right to win or kind of creating an opportunity to win, I think we require companies which are investing meaningful amount of capital in R&D, or they have access to global R&D because of their parentage, or they have possibly in some markets because of their business model created duopolies which will last longer than what we can imagine.
So, this is the way we are looking at the kind of businesses and like you rightly said, I think a lot of established businesses will also innovate and change their model and we have seen that happen internationally fairly significantly in the last 10-15 years.
Do you reckon that while you have access to or the opportunity to invest across market caps, that a lot of innovation is happening at the younger end of the market cap curve or is it not so?
Sailesh Raj Bhan: So interestingly, many sub segments of the market today are starting to see that and it's visible to all of us. A lot of these new age companies which are now listed have capital and have created market shares, which are fairly significant and are growing much faster than average revenue growth in India and also getting to profitability fairly quickly, then what initially they would have thought about doing it.
I think that space is very interesting, that is one space which is visible. A large amount of capital has gone into this space in the unlisted side in the last 10 years. I think all of them will be available for investing/listing. So, I think it's a matter of time in the next 12-18 months, we will have a large number of these businesses also coming for listing. There also the focus will be on businesses where they build the right to win and not businesses that are just burning cash for the sake of it.
The second last segment is the multinational space in India. See, India is becoming extremely relevant for global companies and companies which are today established in India, multinational businesses seeded their businesses for the last 20-30-40-50 years. They are now at a takeoff point because that is what is likely to happen when you set up large projects.
You're doing a $5 billion projects, $3 billion project, $10 billion project and that's government investments, even private investments required significant areas of investment in efficiency technology, which are not easily available in Indian companies or at least smaller Indian company.
So, these global competencies and capabilities are an important part we are going to play through this, and this will be visible to us, because certain large business projects and all with the scale at which India is doing now is not comparable to the global project. So, you will have some of these multinationals for business sizes today are very small you know, Rs 3,000, 2000, 5000 crores can be multiples of size in the next 10-15 years. So, this is one space which is interesting.
The third area is all the new age, not necessarily the listed companies but there are a lot of new age teams which are underway today. That is electric vehicle significant transition will happen, all the energy transition space there is significant investments which will come about, and this will feed into the manufacturing space as well. So, there is enough and more technology or differentiation possible to either increase efficiency or drive growth or possibly deliver new kinds of services which are generally not available to traditional guys who have not invested in R&D.
The third space is same select pharma businesses which have built global capabilities not only in the commodity space, but more on the specialty side are also important and interesting opportunities there and lastly, there are a lot of companies redesigning their business model totally. For example, you found some companies with a business model which can have 5-10-15% higher growth rate than the market or the competition in the same area and these sets of businesses generally also tend to have higher profitability because they are working in a very different way and attacking the market very differently and some select business models like these also are there where they have some permanent or material long-term advantages which have been created.
So, these four segments allow us to create a portfolio in this area and like I said, tons of businesses will also list in this area which will be important, like software as a service as a category which is pretty not listed. So, you will have all of this private capital coming to public markets, given that there is no longer the large amount of unlimited private capital which was there in the last few years.
Would it be safe to assume that a lot of companies that will be available to you are not companies that are getting benefitted from external forces as much as doing or changing the processes from within and making the whole landscape their own?
Sailesh Raj Bhan: So that's a very interesting thing, a sustainable edge is what which is internally built, and we have got even new large projects which are happening whether it is government funded also, the right to win exists with two-three players only because very selective technologies are needed, which are not there in across the board.
So those set of businesses will have a defined competitive edge will also participate in the sale, but these wouldn't be those traditional EPC business. So, these will be project-oriented businesses, these will be product and technology-oriented businesses is where the focus is.
If you look at it today, our indices comprise, the larger entitles comprise a lot of weight from the traditional business, which obviously have their own right to win their own growth rates. But I think much higher growth rate will be found in a universe which has got greater investment in technology, greater investment in futuristic businesses, and that space gets left out in our typical diversified funds, because it doesn't have so much participation in the index.
So, our attempt is to see where it can be four or five years ahead of where these possibly hopefully will be having larger components and weights and indices in the next 5-10 years. So that's our approach to it.
Would it be a concentrated strategy that you would follow, or would it be diversified?
Sailesh Raj Bhan: It will be diversified to the extent possible within the theme because out of the 10 sectors, which are their indices, maybe five or six only will be having a large number of innovation or having a larger component of innovation within them. So, within that sense, it will have about maybe five six sectors at most points of time.
Maybe it will have between 35 to 45 stocks or 40 to 50 stocks, in terms of distribution. So, I will say attempt will be reasonably diversified within the constraints, it will not be as diversified as an equity diversified fund and hence we are positioning it and marketing it as a thematic product, so it does have a different risk profile than a pure diversified equity fund.
Sailesh, you have both the market cap flexibility but the sectoral flexibility as well?
Sailesh Raj Bhan: So interestingly, it will not be narrow focus. It's not like a specific single vertical-oriented thing hence the diversification will be higher, but will not be closer to the large equity, diversified schemes, categories but it is certainly a midway between pure diversified schemes and monolith sector thematic strategies.
Do you hope to build a fund which will have a slow steady growth almost every year?
Sailesh Raj Bhan: The reason why this has been categorised as a thematic strategy is primarily to reflect this fact that this will be a medium-term, long-term strategy to be participated in and it will certainly have significant I will say deviations from the benchmark, underlying benchmark given the nature of this product is and hence you may have differences in performances of this versus the benchmark.
The idea is are we owning the businesses of the future that is the attempt and if you can have that I am sure every equity fund will also have but the proportion to which we will own in this will be close to 80% plus of the portfolio assets because that is what is the way we are defining the innovation fund which we have.
So, it will have I think, to your question, whether it will be and it will have Jacob opportunity or it will have flattening performance in the near-term and all that I think all this is possible. But the approach is very clear, have a meaningful horizon of 5-10 years when you are taking this strategy as a part of portfolios.
See this strategy as a part of thematic investments, not the basic diversified fund at the moment, at least till the category really evolves, till the innovation set of universe becomes much larger and I think the attempt is the portfolio should be way different from what typical diversified equity funds today reflect because their character is defined by a specific categorisation, which is that.
Do you believe that the opportunity size of growth for some of the companies that you are targeting to be a part of this fund is multifold?
Sailesh Raj Bhan: So exactly that is the approach. See, innovation in India is maybe if you look back in U.S. and all it's happened to a very large extent in the last 10-15 years but in India it's just beginning to happen in the last 5-7-10 years because there are very few businesses who have really invested large amounts of money in R&D and this space will be very exciting in the next 5-10 years because a lot of companies will be able to create products.
See software as a service today virtually don't have a company listed in the category and share of all the new technologies in a lot of traditional businesses still very, very small. So, it is just evolving. I think the opportunity is large and it remains to be exploited and captured and I am sure Indian businesses or entrepreneurs are there to make it happen and even a large amount of capital has gone into the private side.
So, I think the whole space is just evolving and like you said, many of the last technologies today will be $100-200-500 million in sizes today, which is nothing from the scale India is looking to be in the next 10-15 years. So, in that framework, the opportunity is very, very meaningful.
Gurmeet, let's begin with this NFO first, what do you make of a fund offering like this which is thematic in nomenclature?
Gurmeet Singh: Basically, today we live in a world of innovation and you know what this, I believe what Nippon is trying to do through this fund is they are letting the investors participate in these exciting new opportunities of these forward looking businesses.
What is also being conveyed here is that innovation is not limited to just inventing or launching new products and they are also trying to dispel this misconception that this only consists of I.T. companies, startups or small caps. What is on offering here is basically trying to encompass the various kinds of innovations, be it a product innovation, business innovation, or a process innovation.
To put things in perspective for an instance if I have to take a real-world example, there's a large fintech company, which is basically a financial services company which took a business which is decades and centuries old, which is a lending business and we did a product with new features, where there was low-cost EMI, there was quick dispersal, leveraging technology, and there was low cost of acquisition, which basically was a hit with consumers and as a result, they gave a huge market share.
So, it was not a new business, this is an example that innovation can happen in existing business. Another example of a business transformation or renovation could be where a company which started off reviewing restaurants then, today is one of the largest food delivery companies. So, innovation can come in, in different businesses. What I believe is they're trying to launch a fund which captures everything. They're going to be focusing on a high growth businesses, high quality businesses, companies, so if you see the innovation today, all the disruptors, innovators, today, you are having a disruption and each and every business. Look at the way we now look at banking.
So, for example, if you see that I haven't visited my own branch in the last 10 years because I could achieve/retrieve everything through net banking. Look at the way today, you know, the OTT platform has changed the way we sort of see entertainment, the way we consume entertainment, this is completely changed.
So this fund is exclusively going to be catering or investing into the companies which are doing some kind of innovation and it is not limited only as I have mentioned earlier to the information technology or the startups, for example, we will also be looking at MNCs, which have a global sort of research presence, and they have a presence in India and they will leverage sort of their global research to scale up their business in India and also, companies if you see there's a lot of private capital, which has gone into these new age businesses over the last few years. So, at some point in time, they will be looking for public participation. These businesses try and sort of capture those.
Having said that, I must mention that these businesses will be investing to the new businesses. So the investors who will consider investing in these funds should consider a longer-term horizon as compared to your normal diversified equity fund because when you're trying to invest into the company's future, looking companies that that adoption of technology takes time and for those business to actually scale and gain meaningful market share, it takes some time for I think for that reason, the investor should have a longer-term horizon when they invest into scheme like these and this should be a part of their satellite portfolio rather than being a part of their core portfolio.
I hear you distinctly say that people should invest for the long term because maybe a large portion of the gains could be back ended in that because things might take time. Would it be prudent, therefore, to either do an SIP which is short-term in nature?
Gurmeet Singh: I personally always prefer the staggered route. So, it's very difficult to sort of predict the future but it is easier to predict the present. So today if you look at your markets, this company is not that is only be looking at companies we want to be listed in future.
This company is going to go ahead and sort of invest in the companies which are already listed and acquired. So, considering today's market scenario, I personally think that the SIP route will be a better approach to investing in this fund.
What are the risks to this investment? What kind of investor should avoid investing in this fund?
Gurmeet Singh: As I said, this business will sort of be looking invest in to this new age businesses, as I said that when you're investing into these forward looking strategies, so adoption could take a longer period, so investors with a very long horizon should come and as I said it could be a part of your satellite portfolio so they could be volatility because when you're trying to gain market share, and you're trying to do disruptions, sometimes it takes much longer, and market sort of rewards, sort of immediate gains.
So, from that angle, it could be that you need to come with a very long horizon. There could be volatility in products like that because this is going to going into new technologies, new age businesses, and also sort of those businesses were trying to sort of disrupt existing business. So, you need to have a very long-term horizon for people who sort of cannot stomach volatility should stay away.
That's where also actually I revert back to my earlier point, that's where SIPs help you. So, your investment is sort of going in a staggered way. So, you're not putting a big lump sum of funds, so that way when you get your report six monthly or weekly you say, it is alright, you have not committed a big lump sum, you stagger your investment over the years, and as these businesses mature and they deliver the results, you will see the gains.
Are there some thematic funds that you particularly like because of the inherent characteristics or the fund manager or the house or all of these put together?
Gurmeet Singh: Actually, we do a lot of thematic funds. I think sometimes what happens is that some of the themes which are sort of underrepresented in the index. So, from that angle, while you may invest in a diversified equity fund, you may not be able to sort of capture the whole gain that that sector may deliver. So, from that angle, the thematic funds bring in a good choice if one is bullish on the theme.
There are some specialised sectors such as healthcare, which offer a huge future potential, so today you may, which are from underrepresented in index. So, for those in order to capture those themes, I think you may need to consider thematic funds.
So, I think whether that's healthcare or I.T. or whether products like these innovations, which are like differentiated theme and maybe underrepresented in index. So, those are the themes that one must consider a thematic fund as long as it matches with the risk appetite and their objectives.
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