The underlying message, of course, was that the investment strategy of Morgan Stanley's fund managers have finally paid off. They can now rightly proclaim that they are delivering value for money to their investors, since their selective buying and holding of securities was a better strategy than buying the market and holding throughout the period. Of course, MSGF has definitely improved, and its balance sheet for 1997-98, compared to 1995-96, was much cleaner in terms of many illiquid stocks and worthless stocks not finding a place.

But the argument that investments in MSGF are better than index based fundsappears to be misplaced.

Firstly, the fund managers have compared themselves with BSE-200 and S&P CNX- 500 and not the Sensex.

This comparison may not make much sense. A look at their portfolio indicates 25 stocks which comprises 82 percent of their portfolio. This is cerainly not true for either the BSE 200 or the CNX 500. The comparison, therefore, is not between like and like. Further, the stocks which constitute 82 per cent of MSGF's portfolio account for less than 15 percent of the total market capitalisation of BSE-200 and S&P CNX500.

The weightage of these 25 scrips on S&P CNX-500 is just 14.05 per cent as on 26th June 1998. The comparsion with BSE-200 is even more strange as more than half of these 25 odd stocks do not find a place in BSE-200. This includes stocks such as Container Corporation of India (CCI), Hind Lever Chemicals, Vikas WSP, Asahi India Safety Glass, Kodak India, Burroughs Wellcome, Tata Infotech. In addition, there is a question mark on the market value of CCI, because a largepart of the free stock of CCI, is also with MSGF.

As far as the remaining stocks are concerned, their aggregate weights as on March 31, 1998 on BSE-200 is around 12 per cent. This figure would not be substantially different on June 26, 1998, the day which has been taken for comparison of performances.

Apart from the fact that the aggregate weights of 82 per cent holding of MSGF is insignificant in the calculations of BSE-200 and S&PCNX 500, there is a fundamental problem of considering the above two market indicators as a representation of true picture of market. In India, many of the scrips in BSE-200, and S&P CNX -500 attract small volumes. The lower liquidity means that the market is unable to price the securities at fair value. Hence it would be naive to imagine that investors have built up their portfolio in a manner which matches the indexes of BSE-200 and S & P CNX-500.

Most of the researchers agree that BSE Sensex is a far better index, because of the liquidity in the scrips and the fact thatmost of the unsystemic risk is diversified in a portfolio of 30 stocks only.

Once we compare the performance of the MSGF with the sensex, we find that the sensex has outperformed the MSGF. From March 31, 1997 to March 31 1998, the sensex gained 21 per cent. In comparison, the NAV of MSGF rose by 18 per cent in the last one year ending March 31 1998, clearly showing an underperformance. A better way of looking at the value of a close ended fund is not to take the NAV but by taking the price at which it is traded, since this is the value available to the investor if he wants to sell his investment now. Moreover MSGF redemption is due on February 2, 2009, further justifying the fact that traded price is more important than NAV.

Here we find striking underperformance by the MSGF. The returns on unit price traded in 1997-98 was negative 4.7 per cent. Even the fifteen month comparison figure would yield a negative growth of 1.5 per cent for the sensex as compared to a negative 5.512 per cent for the fund.Importantly, the crude indicator of returns of portfolio does not consider the risk of the investments. It is quite possible for a fund to earn abnormally high returns, by taking high risk. Hence to overcome this, we use Sharpe's and Treynor's performance measure, we again find that returns on MSGF are not commensurate with the risk of its portfolio. For our calculations we have taken the market price. The Sharpe measure gives a value of Function (return v/s risk) as 0.006229, while that for MSGF is (-0.0409). Similarly the Treynor's model indicate function (return v/s risk) for BSE sensex as 0.056, while the identical figure for MSGF is (-1.65122). This shows that the return earned by the fund managers is not adequate for the risk in the portfolio. Investors would have been better off if they would have invested in an index portfolio of the BSE sensex.