The undisclosed application of fundamental parameters to weights is the biggest negative

It is a three-year old open-ended equity exchange-traded fund (ETF) from Motilal Oswal Mutual Fund (MOSF). Although it is linked to the constituent members of the CNX Nifty index, it is not a passive index ETF.

PASSIVELY OR ACTIVELY-MANAGED?

It is a passive Nifty ETF that will invest its corpus in 50 Nifty stocks in the same proportion as they officially weigh in the index, which is based on free-float market captilisation of the stocks. But Most M50 ETF invests in the 50 stocks of Nifty based on weights decided by MOSF's proprietary financials-based parameters whose description is disclosed by MOSF but not its application. The fundamentally-weighted 50 Nifty constituents makes up for Most 50 basket, which is the underlying portfolio of this ETF.

Shareholder funds, return on equity (RoE) and retention ratio are the parameters that go into deciding the weights of the Most 50 basket. But the scheme infor mation document (SID) of Most M50 ETF does not spell out the details of what level of shareholder funds, RoE or retention ratios of a constituent much company will lead to how weightage for that company. The weights are re-balanced annually when latest yearly financial figures of the compa nies are available. Weights can be re-balanced for reasons other than company fundamentals.

SCHEME OBJECTIVE:

The idea is invest more in companies that show better financial performance on the three parameters chosen by MOSF, and invest lower amounts in those that show poor financial performance on the same counts. This strategy, MOSF believes, will fetch higher returns for investors in the long run.

ASSET ALLOCATION:

Underlying Most 50 basket gets 95-100 per cent with up to 5 per cent reserved for cash OTHER

FEATURES:

The scheme is benchmarked to Most 50 basket. Being a listed ETF, retail investors can buy or sell M50 ETF units on the sto ck exchanges.

The undisclosed application of fundamental parameters to weights is a big negative for investors seeking exposure to pure, passively-managed ETFs. The unavoidable long gap of a year between rebalancing of weights is another negative if an investor is looking for dynamic assignment of weights or once a quarter at least. Performance-wise, M50 ETF has failed so far. Based on weekly NAVs between September 20 2011 and now, M50 ETF has trailed Nifty Total Returns Index in rolling one-year returns in all weeks barring a couple. The average of one-year returns in the 103 weeks between M50 ETF and Nifty TRI returns is a negative 3.4 per cent.