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Kotak Mutual Fund has launched a fund of funds (FoF) investing in East Asian Real Estate Investment Trust (REITs) on 7 November. An FoF invests in other mutual funds and not directly in stocks or securities, while a REIT invests in real estate and derives returns from rents as well as property appreciation. The Kotak fund will feed into a global fund managed by Sumitomo Mitsui DS Asset Management, a Japanese asset manager, which in turn invests in REITs in Singapore, Australia, Hong Kong and a few other countries.

The Kotak collaboration with Sumitomo Mitsui AMC comes about a year after it launched Kotak Pioneer Fund in association with CI Signature, a Canadian fund house, with the international portion going up to 35% of assets. Kotak Pioneer is up 28% since its inception in October 2019.

“We wanted to offer investors global diversification. Offering a REIT adds yet another element of diversification since it is not debt or equity. In fact a REIT is closer to debt than equity and hence can offer investors the advantage of rupee depreciation without some of the accompanying volatility of global equity. Also, it is focused on Asian countries since they tend to be faster growing than the more mature western economies. The sectors that it concentrates on such as logistics and data centres are seeing a boom in east Asia," said Nilesh Shah, managing director, Kotak Mahindra Asset Management Co.

The underlying Sumitomo Mitsui fund, which was launched in 2011, is based out of the Cayman Islands. It has assets under management (AUM) of slightly more than $1.1 billion and an average dividend yield of 4.3%. The expense ratio of the FoF will be 2%, including the underlying fund’s expenses.

According to the Kotak AMC presentation, the Sumitomo Mitsui fund gave returns of 26.4%, 5.5%. 20% and 12.6% in calendar years 2019, 2018, 2017 and 2016 in rupee terms, respectively. It’s worst calendar year return was in 2015 when it gave -0.23%. The Nifty (as measured by the Nippon India ETF Nifty BeES), by contrast, gave returns of 13.5%, 4.6%, 30.1% and 3.9%, in the same periods, respectively, meaning that it was beaten in three of the past four years by the Sumitomo Mitsui fund. In the current calendar year, however, the Nifty is up 9.77%, while the Sumitomo Mitsui fund is up 5.47% (as of November 2020), according to the Kotak AMC presentation.

The Sumitomo fund invests in REITs in Singapore (48%), Australia (34%), Hong Kong (9%), New Zealand (3.1%) and a few other countries, including a small allocation to India. The REIT is focused on logistics, data centres and retail sectors.

watch out for

Investors should watch out for a few things before investing in this NFO.

First, the Sumitomo Mitsui fund is focused on a few East Asian markets rather than being truly global.

Second, it invests in REITs which take leverage (borrow money to invest) which is currently 30-38% of the assets in different geographies. In other words, for every 100 of equity, another 30-38 are borrowed and invested. This can magnify returns in good times and hurt them sharply in downturns. Leverage is also present in REITs in India such as the Embassy Office Parks REIT.

Third, there are multiple currencies at play and returns will be affected by how they pan out against the Indian rupee.

“This is a niche product that invests in the real estate of certain Asian countries and will only suit high net-worth individuals (HNIs) with a high-risk appetite," said Santosh Joseph, founder, Germinate Wealth Solutions LLP, a Bengaluru-based mutual fund distributor.

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