Unifi received an in-principle approval from market regulator Sebi last week to start its mutual fund operations. Founded in 2001 by a clutch of investment professionals, the company has an impressive ₹20,000 crore assets under management. For the first 10 years of its existence, the company was focused only on south India, where it built its reputation, mostly by word of mouth.
Twelve years later, in 2013, it opened an office in Mumbai and then started exploring the rest of the country. At that time, the fund house had less than ₹300 crore in assets under management. Subsequently, it entered Delhi in 2016 and now have clients in 22 states.
The company’s success can be gauged by the fact that many registered investment advisers (RIAs) have been recommending its portfolios to their customers. One among them is Saurabh Mittal, RIA and founder director of Circle Wealth advisory. “I wanted my clients to have a differentiated portfolio from the traditional mutual funds that they were investing in. I saw that it (Unifi) ran a focused strategy of 10-15 stocks and had low overlap with mutual funds. It picked stocks that were largely unknown to the markets,” said Mittal, who was among the first advisors in Mumbai to recommend its portfolio in 2013.
The company’s executives, including founder and chief investment officer K Sarath Reddy did not respond to any queries from Mint.
A few other RIAs told Mint that Unifi Capital has one of the best client communications in the market, making it comfortable to work with the firm.
“When we want any support, the company is quick to respond and sometimes its representatives even come down to our office to discuss a client’s portfolio. They also do quarterly research, half-yearly, and annual reviews. This amount of effort they take to communicate is why Unifi appeals to me,” said Rohit Shah, RIA and principal officer at ‘Getting You Rich’.
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That brings us to the question: How has its PMS performed so far?
Unifi Capital has nine equity strategies in its PMS structure and one high-yield strategy in the debt segment. It follows the traditional long-term value investing style and stays away from new-age strategies like momentum, quant-based strategies, or algos.
Many RIAs and distributors told Mint that Unifi Capital is not accepting new investments in any of its portfolios since 1 November although existing clients are allowed to top up their investments.
The AMC follows theme-based investments based on niche Indian scenarios. It would first find themes that could see a structural shift in the next 3-year to 5-year horizon and then choose fundamentally strong stocks from it.
One of its portfolios ‘BCAD’, which stands for ‘Business Consolidation After Disruption’, tries to capture the consolidation of businesses from the unorganized to the organized sector. This is based on the thesis that the informal sector currently accounts for about 35% of the country’s GDP but certain regulatory, taxes, scale, and legal challenges over the years will lead to the unorganized players losing market share in the hands of big players. This portfolio delivered 15.91% returns, compared to the benchmark return of 12.46%, since its launch in 2018. All of Unifi Capital’s portfolios are benchmarked against the S&P BSE 500.
The ‘Insider Shadow’ fund seeks to put money where promoters have acquired or have repurchased their own shares at the market price. The premise here is that promoters know more about their companies than their shareholders and if they are buying more shares at current prices, then it is a sign that the shares are undervalued. This portfolio has delivered a return of 15.4% compared to the BSE S&P 500 12.24% since its launch in 2020.
Then there is the APJ 20 fund, which was inspired by late scientist and President APJ Abdul Kalam’s book India 2020’ This theme seeks to invest in a basket of stocks that will benefit from India’s growth. The investable universe includes sectors like agriculture, specialty chemicals, mining, high-tech manufacturing, and infrastructure. It has delivered a return of 22.6% compared to the benchmark return of 13.75% since its launch in 2015.
The AMC also has a flagship fund called ‘blended rangoli’, which cherry picks the best stocks across the seven themes running in separate portfolios. It has delivered a return of 21% compared to the benchmark return of 12.84% since its launch in 2017.
Although none of the strategies have lost money, the going has not always been rosy for Unifi’s investors. In 2018, when the small-cap and mid-cap sectors took a huge beating, its portfolio also saw a huge drawdown since it had invested mostly in these companies.
“Looking at the large drawdowns that time, some people panicked and even exited Unifi’s PMS,” said Mittal, who says some of his initial clients even made 8-10x returns over 10 years in Unifi’s PMS products.
The reasoning that the company gave to its clients at that point of time was that the setback had happened largely due to the change in mutual fund classification. In 2018, Sebi said that large-caps funds of any asset management firm had to put in at least 80% of its investments in the top 100 companies based on market capitalization. This led to a lot of mutual funds selling their stakes in mid- and small-size companies and hence the underperformance compared to the benchmark.
“If you look at the 2018 calendar return, you will see that the Nifty 50 and Nifty small cap 250 index showed a negative correlation,” said Mittal.
After 2020, Unifi’s portfolio has had a great run and those who stuck with it saw a recovery soon after, he added.
MF avatar
The question that most investors are likely to ask now is how the fund house will replicate the success of its PMS and alternative investment fund (AIF) in its mutual fund venture.
For one, the kind of portfolios it has currently will be hard to imitate in the MF structure. The market regulator’s definition of categories is based on market capitalization but Unifi focuses on themes around structural trends. Even thematic funds are largely secor specific whereas Unifi capital picks companies from various industries
Also, Unifi has a focus on investing in mid-cap and small-cap companies but, in view of its growing assets under management, it has now started looking at large companies as well.
Lastly, the firm will need to be media-savvy so as to communicate better with investors. Unlike with its PMS and AIF strategies where it could convince its limited number of clients, almost all of whom are high net worth individuals, against redeeming their investments during any underperformance, it will need a different communication strategy for the mutual fund business where it can address the concerns of all unit-holders.
“Even stalwarts like Prashant Jain of HDFC AMC got crucified during times of underperformance. How well Unifi gets out of its closet and communicate with unitholders will play a crucial role in its success in the MF avatar,” said Ravi Saraogi, a Chennai-based RIA.