Due to a polarised market in the recent past, focused funds, which bet on high conviction stock ideas by holding a concentrated portfolio of up to 30 stocks are gaining investor attention. These funds have the leeway to invest across market capitalisation and sectors. Typically, these funds are categorised under the multi-cap strategy.
As on December 2020, there are 25 focused funds in the industry managing assets worth Rs 63,814 crore, which is 7% of Rs 9.06 lakh crore open-ended actively managed equity mutual fund assets. The category has delivered 15.69% in the calendar year 2020.
Here are two focused funds reviewed by our analysts in 2020.
Aditya Birla Sun Life Focused Equity Fund
- Fund Manager: Mahesh Patil
- Star Rating: 4 stars
- Analyst Rating: Neutral
- Analyst: Kavitha Krishnan
- Date of Analysis: April 2020
- Number of Stocks: 32
- Holding in top 10 stocks: 53%
- Investment Style: Large Growth
- Date of Inception: October 2005
- Return: 20.35% (1 year), 9.39% CAGR (3 year), 13.95% CAGR (5 year), 14.22% CAGR (since inception)
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Fund Overview
The process is a typical growth-oriented large-cap strategy. However, what works is Mahesh Patil’s skilled stock-picking and implementation of the strategy. Typically, he will invest in companies that display strong earnings growth potential while focusing on parameters such as Return on Equity or ROE, and Return on Capital Employed, or ROCE. Patil makes use of relative valuation measures, such as Price to Equity or P/E, Price to Book Value, or P/BV, and Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortisation, or EV/EBITDA, vis-a-vis comparable peers when selecting stocks. That said, he isn’t valuation-conscious in the strictest sense.
Although he looks at valuations closely, Patil is willing to be flexible if he is convinced of the growth prospects. Patil has used short-term tactical plays to good effect on several occasions. Patil considers the benchmark IISL Nifty 50 Index while constructing the portfolio. That said, he is not averse to increasing and reducing his allocation to the same stocks routinely based on price momentum and valuations. This pattern is perceptible in his long-held investments as well. Given that sector weights are aligned loosely to those of the benchmark index, the top-down approach is less significant than the bottom-up approach, but it isn’t ignored. Patil also studies macroeconomic factors to determine overweight/underweight positions across stocks and sectors. In our opinion, the strategy is uncomplicated, but it acquires an edge owing to Patil’s execution.
Franklin India Focused Equity Fund
- Fund Manager: Roshi Jain
- Star Rating: 4 stars
- Analyst Rating: Bronze
- Analyst: Himanshu Srivastava
- Date of Analysis: December 2020
- Number of stocks: 27
- Holding in top ten stocks: 62%
- Investment Style: Large Blend (mix of growth and value)
- Date of Inception: July 2007
- Return: 22.54% (1 year), 8.48% CAGR (3 year), 14.72% CAGR (5 year), 12.93% CAGR (since inception)
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Fund Overview
Roshi Jain is the lead manager of this fund since July 2020. The investment process is research-intensive and relies heavily on a bottom up approach. Portfolio managers and analysts jointly decide on the coverage list where they look for growth companies that fit their qualitative requirements.
Only companies that have durable competitive advantages versus peers, sustainable business models, strong entry barriers, able management teams, and good corporate governance standards are included in the coverage list. This is followed by quantitative analysis in which analysts gauge companies using a combination of discounted cash flow models and quantitative parameters relevant to the sector. Analysts create sector-based model portfolios that are then combined by the research head to create market-cap-based portfolios.
Roshi uses these model portfolios as her initial reference point. She scouts for sectors and stocks with structural drivers, high growth, and reasonable valuations. She prefers companies that focus on organic growth rather than inorganic and have potential to post strong incremental returns on invested capital over the long term. Jain takes contrarian bets with a long-term horizon if the stock has been affected negatively because of external factors. Taking cash calls is not a part of the investment strategy. In our opinion, the process is sound and workable over the long term, amid facing intermittent challenges caused by the strategy's structure.
You can view the full list of funds under coverage in this category here.
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