Kotak MF’s global fund is a targeted play on real estate in East Asia, Australia

The Kotak Mutual Fund launched a Fund of Funds (FoF) on November 7th, which invests in the East Asian Real Estate Investment Trust (REITs). A FoF invests in other mutual funds and not directly in stocks or securities, while a REIT invests in real estate and generates returns from rents and real estate appreciation. The Kotak fund will flow 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 several other countries.

The Kotak collaboration with Sumitomo Mitsui AMC takes place around a year after the launch of the Kotak Pioneer Fund in collaboration with CI Signature, a Canadian fund house whose international share accounts for up to 35% of the assets. Kotak Pioneer has grown 28% since its inception in October 2019.

“We wanted to offer investors global diversification. Offering a REIT adds another element of diversification as it is not debt or equity. In fact, a REIT is closer to debt than equity, so it can offer investors the benefit of a rupee write-off without the associated volatility of global equity. It also focuses on Asian countries, as these tend to grow faster than the more mature Western economies. The industries it focuses on, such as logistics and data centers, are booming in East Asia, “said Nilesh Shah, managing director of Kotak Mahindra Asset Management Co.

The underlying Sumitomo Mitsui Fund, which was launched in 2011, is based in the Cayman Islands. Assets under management (AUM) are just over $ 1.1 billion and an average dividend yield of 4.3%. The expense ratio of the FoF is 2%, including the costs of the underlying fund.

According to the presentation by Kotak AMC, the Sumitomo Mitsui fund achieved a return of 26.4%, 5.5%. 20% and 12.6% in the 2019, 2018, 2017 and 2016 calendar years in rupees. The worst return for the calendar year was 2015 when it returned -0.23%. The Nifty (as measured by the Nippon India ETF Nifty BeES), on the other hand, posted returns of 13.5%, 4.6%, 30.1% and 3.9% over the same period, which means it was beaten in three of the last four Years from 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 in India. The REIT focuses on logistics, data centers and retail.

watch out for

There are a few things that investors should look out for before investing in this NFO.

First, the Sumitomo Mitsui fund focuses on some East Asian markets rather than being truly global.

Second, the company invests in REITs that exert leverage (borrow money to invest) that currently account for 30-38% of assets in different regions. In other words, for everyone £100 of equity, another £30-38 are borrowed and invested. This can increase returns in good times and hurt them badly in downturns. Leverage is also present in REITs in India such as the Embassy Office Parks REIT.

Third, there are multiple currencies and how they perform against the Indian rupee will affect the return.

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

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