Morningstar Opinion
Sundaram BNP Paribas Select Focus is an aggressively managed fund that takes both stock and sector bets. At any given time, it identifies three themes and invests a significant portion of the portfolio therein. It largely invests in stocks from the large cap segment. The high risk-high return investment proposition offered by the fund is embodied in the lack of diversification at the portfolio level. Further, its penchant for taking active cash calls can prove to be a double-edged sword.
The fund has done a good job of delivering in line with its investment proposition and has a lot of positives going for it. Its investment style can make the fund a candidate for above-average volatility. We believe the fund has done enough to merit inclusion in the risk-taking investor’s portfolio. The fund can be apt in the role of a supporting player in the portfolio.
Performance
Funds offering a high risk investment proposition are expected to fare worse than a typical peer on the downside, and make up for the same when markets rise. Broadly speaking, while Sundaram BNP Paribas Select Focus’ showing on the upside is in line with what one would expect, it hasn’t fared particularly badly on the downside.
The fund was incepted in July 2002. In five calendar years from 2003 to 2007, when markets closed in positive territory, the fund outscored both its benchmark index (the S&P CNX Nifty) and its category average. In 2008, when markets fell, the fund (down 52.4%) nearly matched its benchmark index (down 51.7%) and category average (down 52.0%).
Over the three-year time frame through October 2009, the fund has posted a 10.7% annualised return vis-a-vis 7.9% and 6.8% clocked by its benchmark index and category peers respectively. A similar picture emerges over the five-year period; the fund’s NAV has grown by an annualised 26.4%, and outperformed both its benchmark index (by 5.0 percentage points) and category peers (by 4.7 percentage points).
However, the fund’s performance has faded in the recent past. Over the 12-month period, it has posted a growth of 42.6%; the corresponding figures for its benchmark index and category peers are 63.2% and 62.9% respectively. This can be attributed to high cash levels held by the fund (when markets took off) and also, its investments in banking stocks which experienced a particularly volatile phase in the January-March 2009 period.
Now for some numbers which highlight how the fund has fared in various market conditions. Consider its Maximum Drawdown (a peak to trough decline) for a 14-month period from January 2008 to February 2009. The fund fared worse (albeit marginally) than its peers; it shed 57.5% as compared to the 56.1% shed by its category peers. In the three-year period ended October 2009, in down markets, the fund fell harder than a comparable peer from the India Large Cap category (Down Capture Ratio of 104.2%); but it commensurately delivered on the upside too (Up Capture Ratio of 111.9%).
Strategy
The fund professes to generate capital appreciation by investing in a few select stocks. Expectedly, its portfolio has a concentrated look, both in terms of stocks and sectors. The number of stocks is restricted to 30 and the top 10 stocks account for around 60% of the portfolio. The fund scouts for reasonably priced stocks that offer attractive growth prospects. To abide by its mandate of investing in a limited number of stocks, the fund doesn’t shy away from routinely exiting stocks or reducing allocations when price targets have been met and adding new stocks to the portfolio. A frequent churn in the portfolio can accentuate expenses and in turn impact the returns.
At a sector level, the fund targets three themes and invests heavily in them. These themes account for around 65%-75% of the portfolio. Portfolio data compiled by Morningstar over a three-year period suggests that (on an average) the Materials, Financial and Energy sectors have cumulatively accounted for over 60% of assets. The October 2009 portfolio reveals that at present, the chosen themes are Materials (24.6%), Financial (23.9%) and Consumer Goods (16.1% of portfolio). Given the concentrated holdings, a wrong investment call while selecting the theme can considerably hurt the fund’s performance.
Taking active cash calls in times of uncertainty is an integral part of the fund’s investment strategy. This was evident in calendar year 2008 and first few months of 2009 as well. While this strategy worked well in 2008 when markets were gripped by volatility, subsequently, the fund was caught on the wrong foot when markets rose sharply.
Themes are chosen using a top-down approach; within each chosen theme, a bottom-up approach is used to pick stocks. The portfolio displays a bias for stocks from the large cap segment, with mid caps generally accounting for around 15%. The latest portfolio reveals that stocks from the mid cap segment accounted for nearly 25% of the portfolio. We have learnt from our interaction with the portfolio manager that the fund house defines the large cap universe as stocks with a market capitalisation of at least $2 billion, and that there is no intention of diluting the fund’s large cap bias.
Management
In a fund management industry dominated by male fund managers, Srividhya Rajesh is among the few upholding the female bastion. Presently designated as the VP-Equity, she has been at the fund’s helm since its inception in July 2002. This continuity has undoubtedly helped the fund’s cause. Her association with the fund house stretches over 10 years. She is a CFA Charter Holder and a management graduate from BITS Pilani.
Apart from the fund, she also manages Sundaram BNP Paribas Capex Opportunities, a thematic fund which targets the infrastructure growth story. While the portfolio manager corroborated that she invests in funds managed by her, the investment amount was not disclosed.
Costs
The fund’s expense ratio of 2.11% is in line with that of a median fund (2.12%) in the India Large Cap category.
