Morgan Stanley Growth Fund (MSGF), a fifteen year closed-end growth fund, seeks long term capital appreciation primarily through investment in equities. Dividend payout is secondary and the fund will normally reinvest realised gains and income. Normally, at least 70 per cent of the assets will be in equities. Liquidity is available through listing in a number of stock exchanges.

Launched in June 1994, the fund collected a massive Rs 980 crore against a target of Rs 300 crore - thanks to the`first come first served' clause. The mammoth corpus was predominantly deployed in mid-cap stocks with the equity portfolio spread over 350 stocks. MSGF surged smartly in the first eight months with the NAV peaking at Rs 11.70 as on September 16, 1994 when the Sensex was at 4617.61. But what followed was a disaster. Consequent to the market roller coaster since the third quarter of 1994, the fund's portfolio took a heavy beating as the mid-cap stocks lost heavily in comparison to index scrips.

The NAV of the fund fell to an all time low of Rs 6.74 in December, 1996 before it started looking up. For well over three years, the fund was an absolute non-performer, with its NAV languishing below par value for most of the tenure. In 1996, the fund initiated portfolio restructuring aimed at increasing the concentration in key bets and pruning the holdings. The number of stocks in the portfolio was cut short from over 350 stocks in March, 1995 to about 100 stocks in March, 1998 effectively accounting for 97 percent of the portfolio. Small-cap non-performing stocks were jettisoned and the fund has booked a loss of over Rs 250 crore in the past three years.

Today, the top 25 holdings constitute over 80 per cent of the portfolio while in March, 1996, the corresponding figure was 42 per cent. The fund now has reasonable exposure to the performing sectors of software, pharma and consumer goods. Post restructuring, the fund has been able to outperform its benchmark as well as peers. In the past one year ending January 31, 1998, the fund has posted a return of 53.89 per cent against an appreciation of just 2.83 per cent in the Sensex. Currently, the NAV of the fund is at its highest since September, 1994.

The fund has also shored up its value through continual buy-back of units which trade at a steep discount to the NAV. In the very first year of operation, the fund bought back nearly 71 lakh units at an average price of Rs 9.09. The unit capital of the fund is down from Rs 981 crore in March, 1995 to Rs 760 Crore inJanuary, 1999. Regular buyback of units has helped the fund in at least two ways. One, the fund has always been traded at a substantial discount to the NAV, and buyback of units at a discount has enhanced the value for long term investors. As of today, investment in its own units may be one of the best investment options for the fund. Secondly, it has enhanced liquidity on the bourses for investors exiting the fund.

MSGF currently has an NAV of Rs 11.40 and the fund has given a minuscule return of 2.77 per cent on an annualised basis. In this scenario, if the fund offers a NAV linked repurchase or goes open-ended, there will be a run on the fund. After five years of atrocious performance, investors will be more than happy to quit the fund even if they get back their principal.

Heavy redemptions will destabilise the fund once again and performance could suffer. Morgan Stanley, as an AMC, will have to live with the tarnished image for a prolonged period till some miracle happens to change the investorperception. On the contrary, the fund could remain closed-ended for another couple of years and reward the patient investors with reasonable returns if not spectacular. With an enhanced performance, the investor perception could undergo a change which will work in the favour of the AMC in the long run.

Morgan Stanley is known to manage only closed-end funds world-wide, though Dean Witter, which has been globally merged with Morgan Stanley group handles open-end funds as well. The fund is traded at a discount of over 36 per cent to the NAV. The steep discount looks tempting and is an excellent opportunity for bargain hunters. Though the open-ending or NAV based repurchase is only a remote possibility, the fund will continue to buy-back its units from the market which could flare up the traded price. Also, as the net asset value is on an upswing, the market will take cognizance of the same and the price should move up gradually in order to keep the discount at nominal levels.

Initial investors can also buysome units to bring down average cost of acquisition and enhance investment performance. Investors currently invested in the fund must stay put.