Apr 13, 2016 02:40 PM IST | Source: CNBC-TV18

Here's why holding largecap funds makes sense: Morningstar

An investor should give a bigger allocation to largecap funds in his portfolio because they hold lower risks. Even a first-time investor can dabble in them because they have lower risks than other funds, says Kaustubh Belapurkar of Morningstar.

Morningstar has done intensive research on largecap funds like Birla Sun Life Frontline EQ, Franklin India Bluechip, ICICI Pru Top 100 and SBI Bluechip Fund

Kaustubh Belapurkar of Morningstar Investment Adviser tells us the rationale for investing in them.

According to him an investor should give a bigger allocation to largecap funds in his portfolio because they hold lower risks. Even a first-time investor can dabble in them because they have lower risks than other funds, he adds.

The house tracks the importance of a fund by its ability to protect capital, says Belapurkar.

Most funds are comfortable holding private banks than public sector banks, says Belapurkar. However, in an exception of sorts, HDFC Mutual Fund holds SBI, Punjab National Bank and Bank of Baroda.

Although these holdings have impacted the fund’s performance, Prashant Jain who manages the fund is convinced of a turnaround in them, says Belapurkar.

Below is the verbatim transcript of Kaustubh Belapurkar's interview with Ekta Batra & Anuj Singhal on CNBC-TV18.

Ekta: Take us through all the research that you have done for the past five years. Which funds stands out and why?

A: Let me highlight as to why should an investor be looking at largecap fund. A largecap fund is what we call the core portion of an equity investor's portfolio. It's lower risk as compared to a small or a midcap fund and a sectoral fund. So any investor who needs to be an investing in the equity should be allocating a large portion into a largecap fund, anyone who even comes into the equity market for the first time, this would probably be the easiest fashion to dabble into through a largecap fund where he would see low volatility as compared to any of the equity funds.

However, when we are talking about these specific funds, Morning Star does a lot of intensive research in understanding the processes that go behind building these portfolios. Therefore, I wanted to speak about certain funds that we like in the space. So I will start off talking about Birla Sunlife Equity Fund, the frontline equity, it's one of the largecap fund that's there in the market currently and Mahesh Patil, CIO-Equities at Birla, manages this fund and he has been doing so for the last 11 years.

Looking at the style and the way the fund is managed, it's sort of pure growth strategy where he is looking at high earnings growth, good return on equity (RoE), good return on capital (RoC) and that is where he gets into investing into the largecap stocks. It is a slightly diversified portfolio. It has got about 70-80 stocks and the manner in which you would go about doing this is, he would loosely align his portfolio to the BSE 200 sectoral weights, but he has got great stock picking skills and that is where the bottom up approach comes to the fore in this strategy and if I would talk about the returns of the strategy, over the last five years, it has outperformed the Sensex by about 600 bps on annualised basis which is staggering.

If I look at the consistency of returns; over the last ten years it has been quartile one or quartile two performer throughout. So for an investor to get in this sort of a fund, he is very comfortable that he is going to get consistent track record of returns and we are comfortable with the manager of this sorts.

Anuj: The other one is the ICICI Prudential Top 100. What has been strategy here. We all know S Naren, we talk to him regularly. What stands out for this fund?

A: The reason why I wanted to speak about this fund particularly is, it is a slightly different largecap strategy where it is more aggressive strategy from the ICICI’s table. So, they have a regular diversified largecap fund but this is what I would call a contra strategy on the largecap side. So, if you just look at the portfolio whilst it will be holding the regular sectors, he would actually at this point be overweight sectors like materials, industrials and energy and that is where he is trying to derive value from.

What his strategy would be is he is looking at sectors where the valuations are slightly depressed but the growth potential is still there and those are the ones that he would want to look at.

Anuj: Any examples that you can give our viewers since lot of our viewers are retail viewers?

A: For instance in this particular portfolio the person is currently holding stocks like Power Grid which is one of the stocks that has done well for him. Larsen & Toubro (L&T) is one of the top performers in this particular portfolio over the last five years. So, a lot of managers tend to hold your banks, your pharmaceutical and your technology stocks which has done well. However, he has taken a contra call on some of these sectors and they have played out well for him.

Ekta: One of the common holdings amongst all of them is HDFC Bank.

A: That is right.

Ekta: How much weightage do private financials have versus PSU banks within the funds? Do they even have exposure to PSU banks? What is the weightage to financials as a whole?

A: Traditionally, if you look at it most of the funds would tend to hold sort of private banks in their portfolio. There is not so much comfort around the PSU banks. There are a few marquee managers in this space who are holding PSU banks for instances Prashant Jain of HDFC who is holding a fair bit on State Bank of India (SBI) and Punjab National Bank (PNB) and Bank of Baroda (BOB) and that has hurt its performance over the last few years but when we have been speaking to him, he has got a man’s conviction that this is something that is going to be turning around. He is one of the few managers who have been straddling the other side on the PSU banks along with private banks.

Anuj: The other interesting fund is SBI blue-chip fund being managed by Sohini Andani. You all know Sohini started as on the sell side may be on the research side and now managing funds. What stands out for this fund?

A: One thing, which I want to highlight about the SBI sort of blue-chip fund, somewhere about five years back it was at the bottoms of the pile in terms of performance. Ever since Sohini has taken over, she has bought a very sharp focus to the fund. She also does tend to take a little bit of a contra calls and that probably comes from her background on the sell side research. What is good and what we track is how does the fund perform in a bullish market and how does it do in a bearish market.

The trend that we tend to notice is that most of the mutual funds in India especially in the largecaps side tend to mirror their performance of the benchmark on the upside in the bullish markets. On the downside is where the value of these managers comes in. Where just to give you an example – if the Sensex would fall by 5 percent someone like Sohini’s fund would probably only fall by 3 percent. So, she is protecting their capital in those times and on the upside she is capturing most of the upsides. So, that is where the value can come in from managers like Sohini’s.

Ekta: What is the type of percentage holdings that she has in different sectors? If I look at it Motherson Sumi has done very well for her and she has had this interest in HCL Technologies, Divis Laboratories for a long period of time which continues?

A: Even from the SBI stable if you look at materials, industrials are some of the places where she is overweight vis-a-vis the Index. So, she has taken that little bit of a contra call in that sense where the others would probably be more towards a financials and a technology companies. So, that is where she has positioned her portfolio.

Anuj: Any disappointments that clearly stands out. I mean any one or two funds, which you believe clearly have not managed as per expectations may be have had star fund managers but have not done well for variety of reasons?

A: I wouldn't say disappointments per se because when we are looking at their performance we are looking at a longer track record. That is something very strongly believe in that investor shouldn’t be swayed by looking at just past one to two years performance. Five years is the bare minimum. So, the funds that we are tracking we are happy and we will see temporary blips and investors could be worried about certain funds underperforming in the short-term but clearly our ideas that if you look at over the long-term there is a lot of money to be made and the managers have delivered significant alphas. So, if you just look at the returns anywhere between 400 and 600 basis points on annualised basis, which is fantastic from the Indian investor perspective.

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