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Kotak MF launches Fund of Funds, to invest in east Asian REITs

The underlying SMDAM fund, launched in 2011 is based out of the Cayman Islands. It has an AUM of slightly more than $1.1 billion and an average dividend yield of 4.3%.Premium
The underlying SMDAM fund, launched in 2011 is based out of the Cayman Islands. It has an AUM of slightly more than $1.1 billion and an average dividend yield of 4.3%.

  • The Kotak fund will feed into a global fund managed by Sumitomo Mitsui DS Asset Management (SMDAM), a Japanese asset manager, which in turn invests in REITS in Singapore, Australia, Hong Kong and a few other countries

Kotak Mutual Fund today launched a Fund of Funds (FoF) that will invest in East Asian Real Estate Investment Trusts (REITs). 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 Japan's Sumitomo Mitsui DS Asset Management (SMDAM), which invests in REITS in Singapore, Australia, Hong Kong and a few other countries.

Kotak's collaboration with SMDAM comes about a year after the AMC 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," said Nilesh Shah, managing director, Kotak Asset Management.

"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."

The underlying SMDAM fund, launched in 2011, is based out of the Cayman Islands. It has an 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% inclusive of the underlying fund’s expenses.

According to the Kotak AMC presentation, the SMDAM fund gave returns of 26.4%, 5.5%, 20% and 12.6% in calendar years 2019, 2018, 2017 and 2016, respectively, in rupee terms.

Its worst calendar year return was in 2015 when it gave a return of -0.23%. The Nifty (as measured by the Nippon India ETF Nifty BeES), on the other hand, gave returns of 13.5%, 4.6%, 30.1% and 3.9%. This means it was beaten in three of the past four years by the SMDAM fund.

In the current calendar year the Nifty has gained 9.77%, while SMDAM fund has risen 5.47% as of November, according to the Kotak AMC presentation.

The SMDAM 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. In terms of sectors, the REIT is focused on logistics, data centres and retail.

Investors should watch out for a few things. First, the SMDAM 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 of 30-38% of 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 HNIs with a high-risk appetite, said Santosh Joseph, founder, Germinate Wealth Solutions LLP, a Bengaluru-based mutual fund distributor.

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