Why these 2 flexi-cap funds get a Neutral rating

By Morningstar |  26-05-21 | 

The Flexi Cap category emerged after Securities and Exchange Board of India (SEBI) created a new category called Multi Cap Funds, under which fund managers have to compulsorily invest a minimum of 25% each in Large, Mid and Small cap firms.

Flexi Cap Funds do not have such investment restriction; they can freely move across market capitalisation. Thus, most Multi Cap Funds moved to the Flexi Cap category. The category has delivered 65.56% over a one year period. The top performer PGIM India Flexi Cap has delivered  91.69% as on May 25, 2021 while the bottom performer LIC MF Flexi Cap has delivered 50.43% over a one year period. Flexi Cap is the second-largest category with assets under management of Rs 1.58 lakh crore in the equity funds category as on April 2021.

IDFC Flexi Cap

  • Star Rating: 2 stars
  • Analyst Rating: Neutral (direct and regular)
  • Fund Manager: Anoop Bhaskar and Sachin Anandrao Relekar
  • Inception: September 2005
  • Return: 61.48% (1 year), 8.52% CAGR (3 year), 11.26% CAGR (5 year), 14.35% CAGR (since inception). Returns of direct plan as on May 25, 2021.
  • Morningstar Analyst: Himanshu Srivastava
  • Date of Analysis: May 2021
  • Number of Stocks: 53
  • Assets in top ten holdings: 44%
  • Assets under management: Rs 5,232 crore (April 2021)
  • Investment Style: Large Growth
  • Total Expense Ratio: 1.28% (direct) 1.98% (regular)
  • Fund Overview

One area of concern has been frequent changes at its helm. Kenneth Andrade (June 2006-September 2015) and Aniruddha Naha (September 2015-March 2016) were its erstwhile managers. Anoop Bhaskar led this fund as primary manager from April 2016 until Kartik Mehta became its lead in April 2018, with Bhaskar playing second fiddle. Kartik exited the fund house on 20 Dec 2019, resulting in Bhaskar once again taking the lead here. In December 2020, the fund house hired Sachin Anandrao Relekar as Kartik’s replacement and appointed him comanager. Going ahead, we would like to observe how the team evolves here before gaining conviction on this fund.

Earlier, the fund’s investment strategy was distinctive in nature as it allowed the manager to invest typically in companies that are niche, emerging, and different from the mainstream within a sector. However, as it became challenging to execute this approach effectively, the strategy underwent a makeover; it is now managed like a conventional flexi-cap offering. The investment strategy still allows the managers to scout for unique investment opportunities, but that is mostly as tactical plays rather than a mainstay of the strategy.

The fund has also moved away from its traditional predominantly mid- and small-cap positioning to be closer to its peers, who on an average have 70% of assets invested in large-cap stocks. The idea is not to be an outlier within the category and expose investors to undue higher risk. This refined investment approach is yet to establish a long-term track record.

L&T Flexi Cap

  • Star Rating: 3 stars
  • Analyst Rating: Neutral (direct and regular)
  • Fund Manager: Vihang Naik, Alok Ranjan, and Venugopal Manghat
  • Inception: May 2005
  • Return: 64.35% (1 year), 9.46% CAGR (3 year), 13.43% CAGR (5 year), 13.82% CAGR (since inception). Returns of direct plan as on May 25, 2021.
  • Morningstar Analyst: Kavitha Krishnan
  • Date of Analysis: April 2021
  • Number of Stocks: 52
  • Assets in top ten holdings: 43%
  • Assets under management: Rs 2,635 crore (April 2021)
  • Investment Style: Large Blend
  • Total Expense Ratio: 1.34% (direct), 2.10% (regular)
  • Fund Overview

The managers follow a bottom-up, benchmark-aware investment approach focused on investing in firms that are efficient allocators of capital. Return on Capital Employed (ROCE) is one of the critical parameters used for evaluation. The manager focuses on the profitability and attractiveness of a business, competitive position within its industry, and stage in the business cycle. They consider Discounted Cash Flow (DCF) valuations along with Price to Earnings Per Share (P/E), Enterprise Value to Earnings Before Depreciation Interest Tax and Amortisation (EV/EBDITA) and Price to Book Value (P/BV) as key parameters to look at while evaluating stocks and consider relative valuations within the industry to find firms that are trading at reasonable valuations. They also look at the company’s historical valuations. A lot of stress is also placed on the promoter group. Analysts track a core list of about 300 companies that are evaluated on the basis of business, management, and valuations.

The analysts derive price targets for the stocks and also run sector-neutral portfolios for the sectors, which serve as guides to the managers while investing. The investment approach results in a portfolio loosely aligned with the benchmark. The risk management function plays a critical role in highlighting key portfolio risks and defines limits in terms of the maximum holding that they can have in a company. The fund house also places internal limits on holdings in a company at a house level. The process is sound, and the execution has been good, producing pleasing results for investors so far.

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