Kotak Global Innovation Fund of Fund : Maximizing Long-Term Returns in a Challenging Market

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Introduction

In the midst of a difficult market environment, the Kotak Global Innovation Fund of Fund has been committed to maximizing long-term returns for its investors. In this article, we will address some of the key queries that we have received about the fund’s performance and discuss how the fund has navigated through challenges to deliver compelling returns. As experienced portfolio managers, we understand the importance of innovation and have dedicated ourselves to researching and investing in this space for nearly four decades combined.

The Challenging Market Environment

The timing of the launch of the Kotak Global Innovation Fund of Fund wasn’t ideal. The fund was launched at the end of July 2021, after a period of robust performance for global equities and growth-oriented equities in particular in the years 2020 and 2021. However, the succeeding period proved to be highly challenging for global equity markets, with a steep decline observed from November 2021 until October 2022.

Several factors contributed to this challenging market environment. Firstly, in 2021 and 2022, stock prices were driven more by inflation and interest rate expectations rather than long-term profit growth. As long-term profit growth is key for share price performance, this posed a headwind for the fund. Secondly, the fund’s underweight position in the energy sector, which happened to be the best-performing sector in both 2021 and 2022, also affected performance. Lastly, tough stock selection in North America, particularly in media and software, added further challenges. Although certain megacap tech names performed well, the fund’s media and software holdings struggled during this period.

Learning from Challenges and Adapting for the Future

Despite the macroeconomic headwinds, it is essential to recognize that these conditions are often short-term factors. The underlying fundamentals of a company’s profitability and growth are what ultimately drive share price appreciation over the medium and long term.

Throughout 2022, we carefully re-examined the strength and validity of our individual investment theses to create a robust portfolio capable of generating meaningful investment returns over the medium and long term. Our investment approach remained unchanged, but we learned valuable lessons from 2022 and incorporated them into our strategy to achieve even better performance in the future.

To manage risks, we emphasized the importance of being cautious in risky industries, especially during tough times. We utilized risk models and position sizing techniques to guide our investment decisions. Additionally, we diversified our risks and became smarter about how much we invested.

Highlighting Key Contributions and Detractions

Amid the challenging market environment, certain investments within the Kotak Global Innovation Fund of Fund performed exceptionally well. One notable contributor was Daiichi Sankyo, a leader in oncology and antibody drug conjugates. We believe the market underestimated the company’s shift from generic drugs to innovative prescription drugs, vaccines, and OTC drugs.

On the other hand, Amazon was one of the biggest detractors in 2022. Although it faced short-term challenges, we focused on its long-term growth and profitability and maintained our holdings in the company. With double-digit revenue growth and potential for further expansion, Amazon remains an integral part of our portfolio.

Impressive Returns and Outlook

We are pleased to report that the Net Asset Value (NAV) of the Kotak Global Innovation Fund of Fund climbed to 7.48 as of March 31st, 2023. This represents a significant return of 13% in the last three months compared to 7% delivered by the benchmark, which is the MSCI All Country World Index TRI. This translates to an alpha of 6%, demonstrating our ability to outperform the benchmark.

Since the inception of the underlying fund, the Wellington Global Innovation Fund, it has delivered a compound annual growth rate (CAGR) of 16% in rupee terms, outperforming the benchmark MSCI All Country World Index TRI, which delivered a CAGR of 12% as of March 31st, 2023.

Although we remain cautious of risk assessment during market extremes, we believe that the current market presents a long-term opportunity set. The portfolio’s expected growth rate is higher than it was prior to the pandemic, while valuations are substantially lower. This provides potentially favorable risk-reward dynamics, possibly the most favorable we have observed since the strategy’s inception.

Capitalizing on Innovation and Market Volatility

At the Kotak Global Innovation Fund of Fund, our approach is akin to that of private equity. We aim to build a portfolio that capitalizes on market volatility while focusing on companies with innovative growth and control of their own destiny. Mega trends such as digital transformation, cloud migration, AI and machine learning, sustainability, direct-to-consumer models, and healthcare innovation offer attractive investment opportunities.

As experienced bottom-up stock pickers, we leverage our extensive experience in innovation-rich sectors to manage risks through both fundamental and valuation decisions. We acknowledge and appreciate your continued patience and confidence in our ability to potentially deliver compelling long-term returns.

Conclusion

In conclusion, the Kotak Global Innovation Fund of Fund remains focused on maximizing long-term returns for its investors. Despite the challenges posed by the market environment, the fund has persevered and learned valuable lessons along the way. By capitalizing on innovation and carefully managing risks, we are confident in our ability to navigate through market volatility and deliver compelling performance. We extend our gratitude to our investors for their continued trust and look forward to seizing the opportunities presented by the ever-evolving world of innovation.

Disclaimer: Mutual fund investments are subject to market risks. Investors are advised to read all scheme-related documents carefully before investing.