In volatile equity markets, funds with ‘focused’ strategy have fared better than pure diversified equity funds. This is not always the case with funds that follow a ‘concentrated portfolio’, but in the last one year such funds delivered better returns with strong stock picking skills.
In the last one year funds like Motilal Oswal MOSt Focused Midcap 30 and Motilal Oswal MOSt Focused Multicap 35 have given returns of 50.68% and 53.02%. Others like DSP BlackRock Focus 25 and Kotak Select Focus Fund have given returns of 29.02% and 26.34% respectively in the last one year. At the same time, broader indices have single digit returns of around 9% in the last one year.
Not surprisingly, many fund houses have filed offer documents with market regulator, Securities and Exchange Board of India (Sebi) to launch focused funds. Fund houses such as Pramerica Asset Management (AMC), Union KBC AMC and IDBI AMC are among many which have filed documents for ‘focused funds’.
Taher Badshah, senior vice-president and co-head of equities at Motilal Oswal AMC says, “As an investment process, we follow QGLP — quality of business, growth in earnings, longevity of competitive advantage and price, where we buy good business for fair price. For us, the focused strategy has worked across market cycles.”
In focused funds, a fund manager typically invests in a concentrated portfolio of up to 25-30 companies with superior growth potential across market capitalisation and sectors. The main objective is to identify businesses with superior growth prospects, strong management and reasonable valuation. Many funds also adopt a mix of bottom up approach (for stock selection) and top down approach (for sector allocation).
G Pradeepkumar, CEO at Union KBC AMC says, “In focused funds, the emphasis is on stock picking ability. In our latest offering, for which we have filed with Sebi, we will focus purely on a bottom up strategy. We will not just chase growth but also looking at valuations before buying.”
However, many in the industry believe that, such ‘concentrated’ strategy not always work in a bull market, during which time it is always better to stick with pure diversified equity funds.