‘Special situations’ theme funds make a beeline for investors’ money

ICICI Prudential India Opportunities Fund is the oldest and biggest fund in the category with assets of around Rs 18,000 crore.

Indian fund houses are betting big on special situations investment strategy with three asset management companies — WhiteOak Capital, Kotak Mahindra and Samco — applying for funds based on this theme with the Securities and Exchange Board of India (SEBI) recently.

The special situations strategy operates by identifying and capitalising on unique events or circumstances that can impact the value of a particular investment. Typically, they are flexi-cap schemes, invest in stocks and sectors across marker capitalisation and benchmark themselves to the S&P BSE 500 Total Return Index.

Experts feel that the current market conditions may have to do with the launch of such funds.

“Special situation funds are not largely dependent on the market mood or valuations, because they are largely focused on a very specific news that has to do with that particular stock. This strategy is better placed at this point in time, than the normal buy-and-hold strategy.  This may be the reason why fund houses are coming up with such funds,” said Kirtan Shah, founder of Credence Wealth Advisors.

Also read | First-time equity investor? Limit your risks with large-cap funds from MC30

Indian markets today are trading at higher levels with the BSE Sensex approaching the 75,000 level and NSE Nifty nearing the 23,000 level. Further, experts believe that the markets are also fairly priced.

New funds in the pipeline

Kotak Special Opportunities Fund, Samco Special Opportunities Fund and WhiteOak Capital Special Opportunities Fund plan to invest in opportunities presented by special situations such as corporate restructuring (including mergers & acquisitions, etc), government policy or regulatory changes, technology-led disruption and innovation, new trends, new & emerging sectors, companies or sectors going through temporary unique challenges and other similar instances.

Samco Special Opportunities Fund has already been approved by the markets regulator and the scheme would open for subscription from May 17.

Notably, all three schemes also plan to invest in overseas securities.

Funds on offer

While active fund managers use the special situations strategy to select stocks in their portfolio, three mutual fund schemes in India solely focus on this approach.

These are Aditya Birla Sun Life Special Opportunities Fund, Axis Special Situations Fund and ICICI Prudential India Opportunities Fund.

ICICI Prudential India Opportunities Fund is the oldest and biggest fund in the category with assets of around Rs 18,000 crore. The scheme has delivered 52 percent and 32 percent returns on a one-year and three-year basis, respectively.

Aditya Birla Sun Life Special Opportunities Fund has delivered 46 percent and 20 percent during the same period, while Axis Special Situations Fund is up 37 percent and 15 percent during one-year and three-year periods.

The top three stocks in the ICICI Prudential scheme are HDFC Bank (8.7 percent), ICICI Bank (6.61 percent) and Infosys (4.96 percent). In ABSL MF, the top three stocks are Bharti Airtel (6.17 percent), Infosys (5.47 percent) and ICICI Bank (5.11 percent). In Axis fund, ICICI Bank (4.79 percent), Axis Linde India (4.13 percent) and Zomato (4.06 percent) are the top three stocks by percentage allocation.

Also read | Sensex near 75K: 5 investments to get your financial journey right

This strategy helps fund managers provide a good entry point, however, exit from the portfolio depends on their judgment.

Some of the stocks that entered special situations funds during March 2024 include ITC, Balkrishna Industries, CIE Automotive India, CarTrade Tech and Info Edge (India) among others.

The rationale

Special situations funds closely resemble value-styled equity funds. In fact, one of the biggest drivers of ace investor Warren Buffett's success has been value investing, and specifically looking at generating long-term capital appreciation by investing in mispriced stocks facing ‘special situations’. One of his earliest investments, Berkshire Hathaway, is a perfect example.

Also, launching a new fund helps fund houses to grow their assets under management and also plug the gaps in their product offerings.

Concentrating on the special situations strategy may suit investors with the essential expertise, risk tolerance, and dedication to thorough research.

“There could be financial management change that is happening or a stock that might be coming up for a split or a demerger/merger around the corner; these reasons don’t have much or anything to do with markets being expensive or not. A special situations fund usually works independently to market movements,” said Shah.

The risks

However, it's crucial to recognise that special situations funds often entail high risk. They hinge on the fortunes of companies undergoing substantial changes, and if these companies fail to navigate the situation successfully, investors stand to incur significant losses.

Also read | Invesco Mutual Fund pays Rs 4.98 crore to SEBI to settle inter-scheme transfer case

Moreover, technological disruptions and evolving consumer preferences can trigger transformative changes in industry dynamics. Thus, investors must remain vigilant to anticipate and navigate these shifts effectively.