The focus of this Innovation Strategy or the fund which we are creating is primarily the fact that there will be a different segment of businesses which will win market share over the next 10-15 years versus what has been the last few years. In the last few years, we had a lot of businesses which are traditional and have done well but the winners for the next 10-15 years will be very different. These businesses and companies will have material investments in research and development or may have a business model design which is very different from what traditional players look like. Hence, they will have possibly a better right to win. We have seen these kind of businesses do well over the last 10, 15, 20 years in the US which is generally ahead of most countries in the world in terms of innovation and that space is starting to happen and beginning to become important in India especially where large amount of private capital has gone in the last 10-15 years.
What is important in this particular space is that this capital in the private equity side, would look for public market participation and hence a large number of companies in this space will also list. We also have a good number of multinational businesses with strong global capabilities and their own R&D being world class with their Indian subsidiaries having access to that, it also provides an additional area where the fund will find companies which can be a part of this portfolio.
So our approach to innovation is very simple: either the business model or the R&D investment or basically something which is disrupting the existing space in creating new markets – these three categories will account for nearly 80% plus of the investment in the fund. We think what has happened in the last 10-15 years in the US to some degree at different level could happen in India as well and we would find innovative companies gaining market share, having better profit margins than the traditional companies would have and possibly having growth rates which are ahead of the average index growth rates.
This is a universe we are targeting to create and construct a portfolio with the medium to longer term view. We are looking at investment horizons in excess of five years when investors are coming into this kind of a strategy at the minimum given that this will not be like a traditional diversified equity fund. This is more a thematic fund, it does require a horizon of five years, seven years plus to really capture the whole theme and the opportunity. We are seeding the product today so that as and when this market also grows and new businesses like software as a service companies (SaaS) and many EV businesses list and become a part of the portfolio over a period of time.
I think it is playing into the larger theme where innovating companies generally have margins and profitability and growth better than what average traditional companies can have and our belief is the winners of the last 5, 10, 15 years may not necessarily be the largest market value creators in the next 10-20 years. This is a differentiation we are trying to bring in terms of launching the Innovation Fund.
The NFO has been open since August 9 and August 23 is the end date. What kind of a response have you been getting from the market till now?
Our conversations with previous partners are reflecting and we are communicating the differentiation in terms of the product we are bringing to the market. We are positioning this as a thematic product and that is the communication which has been happening and it is more a medium term opportunity which we intend to capture by launching the product now. This product generally will have a portfolio construct which will have 80% innovation companies, companies with differentiated business models versus a traditional equity diversified fund which may have a large exposure to index companies.
Generally, we have seen traditional companies having much larger market caps. So our idea is to communicate this and that is what we have been doing and we are finding, seeing the differentiation of the product and communicating that has been important and that is what I think the investors are looking forward to.
You are telling that the portfolio construct will have 80% invested in companies that are investing in some innovation. Can you highlight a couple of sectors that will have the key focus. Are there any new age tech companies that are part of that? Are there any pharma companies that could be a part of it?
When we evaluate the universe where innovation is happening, there are four important categories these things are working around. There are companies in pharmaceuticals investing in innovative R&D and selling patented products in the US. There are few select businesses which are attempting to do sizable investments close to $500 million a year on R&D and trying to create opportunities internationally so those companies are one area of investments.
Second, is a lot of multinational companies who have capabilities which are driven by global R&D and those businesses have a significantly long runway in India because their kind of businesses, the large projects, require these kinds of capabilities which are just starting to happen in India. So there is a good set of multinational companies across engineering, manufacturing, innovative companies which serve across industries even in healthcare, even in some areas where they have differentiated products. In India that kind of work is not happening specifically. So these are the companies having those capabilities which will be brought to the table.
The third area is the new age companies. A few companies are now emerging in the listed space where there is a right to win with dominant market shares and because of what has happened in private markets, we are seeing valuations getting a little bit more sensible and rational when they would look for listing. There are a lot of companies which need capital and they would certainly want to access the public market, given that there is clearly a funding winter in the private equity space or the unlisted space.
These sets of businesses have created business models which have at least significant market shares already and have a path to profitability or are the kind of businesses we are looking to participate in. These segments will account for pharmaceuticals, engineering and manufacturing, energy transition space where people are investing significantly. New energy in solar, wind and several other areas of the transmission, distribution and value chain because a lot of innovation has to happen there to be able to handle storage side, electric vehicle side. A lot of these areas will be an important part of the portfolio construct and it will be across the segments.
You have highlighted how the big shift in terms of innovation in traditional sectors like banking, auto as well as media has taken place. What kind of a return expectation will a customer be having from this one? What is the understanding in terms of why the market will give a premium to these companies and what is the fund thinking on those lines?
Interestingly existing companies are also doing significant innovation. They cannot just be an efficient player but they have to do significant innovation, a business model change or their share of revenues from new age or share of revenue from new technology is rising sharply or at least will transition meaningfully in the next few years could be a part of the opportunity in the portfolio.
It could well be businesses; in simple terms, any innovation has to lead to much higher profitability and much higher growth than the competition in the same sector, those will be the deciding factors in terms of how the construct of the portfolio will be. To your question on what is the opportunity here and why this segment should be there, we have seen generally when the segments are and when they are emerging that is where the biggest value creation starts to happen because then with these companies possibly growing at maybe 50% higher than the growth rate of indices in some cases the kind of value creation they can do over the next few years could be fairly significant.
Obviously they come with the risk of being emerging technologies and for that reason you have a balanced share of multinational companies with strong capabilities, Indian companies with strong R&D capabilities and new age companies as a combination in the portfolio. Also, a lot of businesses today which are a larger part of Nasdaq have actually been very young businesses 15-20 years back.
India has been a little behind in that journey because it needs a lot of capital and a lot of innovation has happened in the US but the relevance of that innovation in India is starting to be high. A few international businesses will certainly have larger market shares in India which we may not be able to participate directly, but the opportunity for a lot of Indian businesses to come out and gain market share in these areas remain.
The scope is fairly large and generally the market will respect companies which are creating larger markets, who have a business model where they can earn better profitability than traditional businesses over the medium term and who are growing faster than the market. Given this construct, the opportunity and possibility for investing in this portfolio as a thematic investment with a medium term view is an interesting opportunity.
What kind of payment options will be there in this particular fund?
This will be an open-ended fund and after the NFO closes, this will be available during NFO and after the NFO also for subscription and people can choose either a systematic investment plan based on their needs or they can choose lump sum investing. So it is open for subscription post the NFO period as well.
Can one take on the payout option as well as reinvestment options?
Like any equity fund, there are options where a dividend payout option and the reinvestment option are available. When you look at investing from a five year, 10 year kind of a horizon, because thematic funds require that kind of an approach in investing, generally participating for longer term growth is what will really help investors over the medium term. Generally, investors choosing a long-term strategy prefer growth as an option and that becomes the main option because you are willing to participate in incrementally growing your investment for a longer period of time.
These kinds of businesses tend to generally have very high growth rates and they require incremental capital getting deployed at higher growth rates provides you one option. Investors who wish to have a dividend option or a payout option are also welcoming that particular strategy but given the nature of the strategy, given that it is thematic, given that it is a longer term in nature, growth option is a meaningfully good option from investors to look forward to.
This is a new fund and you are positioning it as a thematic fund. Recently we have seen the markets flip-flopping in terms of that 20,000 mark on Nifty 50 and we are now trying to defend 19400. Going ahead, what sort of a comparison or return expectation do you have from this fund with respect to the benchmark indices?
Logically given the universe comprises companies which will be higher on quality, higher on growth and even higher on longer term growth, I would say, these types of businesses should do reasonably well over a period of time. Comparing it with traditional benchmarks, over the longer term, these sets of businesses should end up having greater profit share and generally when you have that kind of a thing, the possibility of delivering well in terms of returns also exists. But we must realise that these businesses take a meaningfully long period of time to mature and deliver as well and hence horizon should be longer to participate in.
The idea of choosing this innovation strategy is to give investors a completely different portfolio from what generally investors would find in traditional equity diversified funds which have a large cap or a large and midcap bias. We think it will be a differentiated portfolio and the construct will be way different from what a typically diversified fund would be. The theme itself has attractive opportunities.
Some of the themes are coming from scratch today. They are very young today and they will become meaningfully large, there will be multiples of sizes and the whole renewable energy theme which is fairly small today but could be way bigger in the next 10 years.
Likewise even EVs, hardly a million EVs are sold in India today while globally it is becoming a wave. So, that is one space which can be very different in the next 10 years. We are choosing a high growth strategy here and with a potential that can be way different from what traditional diversified equity funds deliver and hence we are coming in a thematic category because it does carry the volatility and the risk which you referred to.
Hence investors with a medium term view, having a five year, 10 year horizon in investing in these kinds of spaces is what we are looking forward to. And it is very difficult to talk about returns in the future but directionally I think the area is very interesting is what makes us confident of the construct of the product.
