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Should you invest in the DSP Global Innovation Fund NFO?

15 Jan 2022 - Contact Sayan Sircar
11 mins read

A new Fund of Fund wants to capture the alpha from innovative technology companies globally. Should you invest?

Should you invest in the DSP Global Innovation Fund NFO?

Table of Contents

Catch them young

After the Motilal Nasdaq Q50 ETF NFO, here is another one with the same “Catch them young” tag line. Read more: Should you invest in the Motilal Nasdaq Q50 ETF NFO?

“Catch them young” is literally the title of the second slide of a deck I got by email. The slide discusses how by the time a disruptive technology company is included in a major index, the major gains have already come using examples like Apple, Amazon, Tesla Adobe, and Netflix. For those unaware of this phenomenon, it is called survivorship bias. The presentation goes on to talk about innovation, disruption and related themes.

The NFO of this fund, which is a fund-of-fund investing in a mix of global technology/innovation/disruption themes via ETFs and active funds, runs from 24-Jan to 7-Feb, 2022.

FOF structure

The DSP Global Innovation Fund (DSP GIF) will be investing in the following funds:

Fund Weight TER (Nov-2021) Type
Morgan Stanley US Insight Fund 15% 0.81% Active
BGF World Tech Fund 20% 0.75% Active
iShares Semiconductor ETF 15% 0.43% Passive
Nikko AM ARK Disruptive Innovation fund 15% 0.82% Active
Bluebox Global Technology Fund 20% 1.18% Active
Ishares Nasdaq 100 UCITS ETF 15% 0.33% Passive

The SID says that the fund choices and weights can change as per the fund manager’s discretion.

The fund will be benchmarked against the MSCI ACWI index. This is a rather strange choice since a thematic fund like this is being benchmarked against the World stock market index. Therefore, the AMC should choose a more appropriate benchmark, maybe against the MSCI ACWI IMI Disruptive Technology Index (details here).

It should be noted that as per the presentation documents, the weighted TER of the underlying funds is 0.74%. The FoF will have its own expense ratio on top of that making it a fairly expensive way to get exposure to the disruptive technology theme.

Past performance

We have been provided past price performance of the underlying funds.

Past price performance DSP GIF Fund as table

We have added the S&P500, Nasdaq 100 and MSCI ACWI IMI Disruptive Technology Index values in INR for comparison.

Past price performance DSP GIF NFO

There are some challenges with the data here:

  • two of the six funds in the list, BGF World Tech Fund and Nikko AM ARK Disruptive Innovation fund, have limited histories
  • individually, some of the chosen funds are highly volatile
  • the basket of six funds (DSP GIF) provides around 3% of extra returns over the benchmark MSCI ACWI at almost double the volatility. If we consider the performance against the more well-known technology-focused indices, like the Nasdaq 100, we see that the fund has provided higher returns at similar levels of risk
  • if we remove the effect of COVID on the technology sector by removing 2020 returns, the average returns of the fund drops to the level of MSCI ACWI World where the average yearly return falls from 13.28% to 9.79%

Past price performance DSP GIF Fund as table without COVID

The last point is called the recency effect since a lot of the of gains in the stock, and as a result, the attractiveness of the theme comes from something that happened in the recent past. The risk of using recent returns when choosing a theme is

  • a lot of the high returns have already taken place. The right time to enter is to get in before the eye-popping returns come
  • entering at this stage implies that new investors are entering at high valuations that require that the companies keep growing at historical rates
  • COVID related themes like WFH, supply chain disruptions and increased retail trading activity that has been the drivers of recent returns for the theme may not last for a long time
  • If technology stocks enter bubble territory, the drawdowns can be severe, as shown in the chart below:

Drawdowns of DSP GIF Fund

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Fund portfolio drill down vs major indices

Using portfolio disclosures of the underlying funds, we can construct a tentative portfolio of the DSP GIF. Given that it is difficult to get the entire underlying portfolio of these funds, the numbers in the table for DSP GIF are minimum values. For example, if Amazon is present in the top 10 in Fund X and below top 10 in Fund Y, the total will not count the contribution from Amazon from Fund Y and the total for Amazon will be slightly lower than the actual value.

Top 10 stocks

We see that top 10 stocks constitute around 20% of the portfolio, and the fund avoids the usual concentration found in the technology heavy indices.

Companies DSP GIF N100 S&P500 MSCI ACWI IMI DT
Microsoft 3.49% 9.84% 5.97% 5.78%
Apple 2.63% 11.78% 6.83% 5.06%
Tesla 2.56% 4.43% 2.25% 0.00%
Lam Research Corp 1.75% 0.66% 0.24% 0.00%
Broadcom 1.66% 1.77% 0.64% 0.00%
NVIDIA 1.65% 4.02% 1.75% 4.77%
Alphabet 1.64% 7.15% 4.11% 5.06%
Shopify 1.49% 0.00% 0.00% 0.00%
Applied Materials 1.45% 0.98% 0.36% 0.00% 1.44% 6.83% 3.60% 4.64%

Stocks below top 10

Here we see some of the premise of having sufficient allocation to upcoming stocks, which have the potential for high returns since they are in the disruptive technology field.

Companies DSP GIF N100 S&P500 MSCI ACWI IMI DT
Block (Square) 1.36% 0.00% 0.00% 0.00%
Zoom 1.26% 0.28% 0.00% 0.00%
ASML Holding 1.25% 0.41% 0.00% 0.00%
Marvell Technology 1.20% 0.48% 0.00% 0.00%
Qualcomm 1.18% 1.42% 0.52% 0.00%
Coinbase Global 0.98% 0.00% 0.00% 0.00%
Unity Software 0.92% 0.00% 0.00% 0.00%
Snap 0.89% 0.00% 0.03% 0.00%
Snowflake 0.88% 0.00% 0.00% 0.00%
Intel 0.87% 1.54% 0.57% 0.00%
Roku 0.82% 0.00% 0.00% 0.00%
Teladoc Health 0.81% 0.00% 0.00% 0.00%
TSMC Ltd 0.78% 0.00% 0.00% 3.88%
Cadence Design Systems 0.78% 0.32% 0.12% 0.00%
Synopsys 0.78% 0.35% 0.13% 0.00%
Adobe 0.77% 1.72% 0.63% 0.00%
Cloudflare 0.76% 0.00% 0.00% 0.00%
Advanced Micro Devices 0.76% 1.13% 0.41% 0.00%
DoorDash 0.75% 0.00% 0.00% 0.00%
Twitter 0.74% 0.00% 0.08% 0.00%
Meta Platforms 0.73% 4.83% 1.97% 0.00%
Mercadolibre 0.72% 0.42% 0.00% 0.00%
Micron Technology 0.65% 0.72% 0.27% 0.00%
KLA Corp 0.61% 0.45% 0.16% 0.00%
Spotify Technology 0.59% 0.00% 0.00% 0.00%
Roblox 0.54% 0.00% 0.00% 0.00% Holdings 0.54% 0.00% 0.00% 0.00%
Twilio 0.53% 0.00% 0.00% 0.00%
Kakao Corp 0.41% 0.00% 0.00% 0.00%
PayPal Holdings 0.37% 1.42% 0.55% 2.48%
Cisco Systems 0.27% 1.78% 0.65% 0.00%

Source of active risk

The following are the sources of active risk in this fund:

  • allocation between the underlying funds. There is no formula based allocation rule defined making choosing fund weights an active decision
  • choice of the underlying funds. Disruptive technology is a theme, and chasing this theme will require a good amount of analysis and identifying companies before they become big
  • 70% of the fund is held in active funds. The decisions by these fund managers will have a considerable impact on the future performance of this fund

Should you invest in the DSP Global Innovation Fund NFO?

The standard recommendation regarding NFO investment is

  • invest if there is a niche that existing funds do not serve. This fund fills a possible niche of investing in the disruptive technology niche
  • wait until the NFO is over and the fund opens for the standard subscription so that fund expenses are known
  • at least a few months of NAV history is available so that tracking error and alpha can be estimated

In summary, investors should avoid investing:

  • if they are wary of valuations, taking high risk/high return bets on the technology sector
  • if they are looking to make a quick buck since market timing is difficult
  • if they are looking for a passive solution, the Nasdaq 100 will be a better fit

Alternative investments in the same theme

The fund names below are not recommendations and are mentioned below to start the research process. Indian investors looking at investing in technology and disruptive innovation themes already have a few options in the market:

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