Reliance Equity Opportunities Gr 101161

Reliance Equity Opportunities benefits from the presence of an able manager and a disciplined investment approach.

When portfolio manager Sailesh Raj Bhan took over this fund in March 2005 (inception), he didn’t have much experience in portfolio management. But since then, he has built a strong resume. Over the years, funds managed by him have developed noteworthy track records. We are also impressed by his investment style, which is fairly research-intensive. When choosing stocks, Bhan scouts for issues that exhibit strong growth prospects and have healthy/rising ROEs. He believes in thoroughly researching a stock and his analysis often goes beyond the obvious; he studies market research trends and qualitative aspects of the business.

Bhan’s investment approach comprises multiple aspects. For instance, taking big sector/thematic bets forms an important aspect of the strategy. He also invests roughly 20% of assets in emerging/niche themes, as he believes they have significant upside potential. Another 10%-15% of assets are invested in value propositions to balance the portfolio’s inherent growth bias with a value tilt. Bhan is mainly focused on small/mid-cap stocks, but he pays more attention to large caps (40%) than a typical India Small/Mid-Cap peer (30%). This is in line with his thinking that investments in small/mid-caps may not bear fruit immediately, and neither may the investments in emerging themes and value propositions as they too have long gestation periods. On the other hand, large caps are in a position to provide market-linked returns and ensure adequate liquidity in the portfolio.

The strategy comes with certain caveats. Investing in emerging/niche companies with untested business models and value propositions is a risky affair. Bhan’s large sector/thematic bets are not without risk, either—a wrong bet could result in severe underperformance, although such instances have been few and far between. Also, the fund’s current asset size is not yet cause for concern, but a disproportionate increase in the asset base could reduce the fund’s distinctive profile, and pose challenges in the form of market-impact cost, opportunity cost, and liquidity management.

However, we are impressed with Bhan’s reasoning and disciplined investment approach. He is supported by a competent comanager in Viral Berawala and a strong investment team. The time-tested nature of the investment process and the fine execution of the strategy reinforce our conviction—Bhan has displayed good skill in steering the portfolio in upward- and downward-trending and sideways markets. In light of the above factors, we upgrade the fund from a Bronze to a Silver rating.