4 funds that deserve a Silver

Equity funds analysed this year which merited a Silver.
By Himanshu Srivastava |  07-10-20 | 
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About the Author
Himanshu Srivastava is a Research Analyst with Morningstar. He would like to hear from you, but cannot give financial advice.

From the equity funds analysed in 2020 by Morningstar’s analysts, only four were given a Silver rating. Most of the funds got a Bronze or a Neutral. The only equity fund to have got a Gold is Aditya Birla Sun Life Frontline Equity Fund.

Here we look at three Silver-rated funds.

DSP Midcap

Mid-cap stocks account for 70%-80% of the portfolio. The fund’s exposure to mid-caps typically tends to be higher than or in line with the mid-cap category norm. He has the liberty to invest up to 35% of assets in large caps, which he uses to good effect when needed.

The fund manager plies a business-oriented bottom-up approach to scout for good quality stocks. His investment approach is clearly borne out by the portfolio where he invests in companies that have able managements, strong competitive advantages, and leadership positions in the areas they operate. He is cognizant of the risks’ involved in investing in mid-cap segment. Therefore, he factors the same and keeps a buffer in the portfolio by investing only in high-quality companies. The strategy also involves theme-based choices where he scouts for turnaround stories or companies that are capex-oriented and linked to overall economic growth. His investments in the building materials and auto ancillary spaces are a case in point.

He constructs a relatively more concentrated portfolio and will not shy away from taking big stock-specific bets in his high-conviction picks. The exposure to cash is capped at 7.5%. He believes in constructing a durable portfolio that can last many cycles and deliver performance over three, five, and 10 years.

Franklin India Equity

The fund’s portfolio largely remains stable in terms of allocation, nature, style, and diversification. Both large and mid/small-cap stocks form part of the portfolio, with more than a 70% allocation to large caps.

Anand Radhakrishnan is benchmark-agnostic while constructing the portfolio and selects stocks using a bottom-up approach. This, coupled with his penchant for contrarian bets, result in a portfolio that is often dissimilar to that of its typical peer. Its overweight position in the telecom sector versus the category and benchmark is a case in point. Similarly, his investment in healthcare in 2017 bears out his willingness to invest against the grain.

Radhakrishnan is building exposure in the financial services sector. He admits that his underweighting in the sector had an adverse impact on the fund in 2019, as in the absence of playable ideas in the general economy, it became the go-to sector. However, he continues to have reservation towards NBFCs. That said, he prefers private-sector entities over their public-sector counterparts, given his belief that the former offer more robust business models and superior operational efficiencies. The portfolio is also overweight in the consumer cyclical sector, which has seen significant downturn. The challenges would continue for the fund until there are signs of economic growth, value bets being rewarded, and markets stabilizing.

HDFC Equity and HDFC Top 100

Prashant Jain isn’t benchmark-conscious while constructing the portfolio. However, when he fails to uncover enough stocks that can generate alpha or believes that valuations are stretched, he doesn’t shy away from aligning the portfolio with index. But that is not to suggest that he is a closet indexer. The portfolio’s top picks have significant overweights versus the index.

He typically stays ahead of the curve. He trimmed exposure in the consumer cyclical space to zero much before it witnessed headwinds.

Also, he has always avoided investing in the NBFC segment given the inherent risk there. To his credit, the risks in the NBFC space played out as he anticipated.

It has had a tough ride for the fund since mid-2019. That could be largely attributed to his investment style being out of favour. Given his valuation-conscious approach, Jain has increased exposure in segments which are attractively valued, such as financial services, utilities, energy and capital goods.

This is consistent with his belief that after a massive sell-off, it’s value which outperforms. He continues to remain underweight on the consumer staples sector given high valuation, and the consumer discretionary space as he believes that COVID-19 will dent demand there.

The portfolio is poised to benefit from the turnaround in the economic environment, but will continue to witness challenges until the trend reverses.

© 2020 Morningstar. All rights reserved. The Morningstar name is a registered trademark of Morningstar, Inc. in India and other jurisdictions. Research on securities, referred to for the purpose of this document as “Investment Research”, is issued by Morningstar Investment Adviser India Private Limited, which is registered with SEBI as an Investment Adviser (Registration number INA000001357), providing investment advice and research, and as a Portfolio Manager (Registration number INP000006156). For the complete disclaimers, click here.

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