Will Sundaram Mutual’s third attempt at rolling out a large-cap fund click?

Along with a host of new scheme roll-outs in recent times comes the Sundaram Bluechip Fund (SBF). This will be the only truly diversified large-cap scheme of the fund house. Typically, most asset management companies (AMCs) start out with a large-cap fund as their first offering. So, why is a 24-year-old fund house launching such a scheme now? To be sure, its other existing large-cap-oriented scheme – Sundaram Select Focus – belongs to the ‘focused’ category that invests in a maximum of 30 stocks.

SBF is not the first time the fund house is trying its hand at managing a large-cap scheme. It had previously rolled out not one, but two large-cap funds: Sundaram Growth and Sundaram leadership. The former was rolled out in 1997, and was in fact its earliest launches and its first ever equity scheme. Sundaram Leadership Fund, on the other hand, was started in 2004, just as India’s great bull-run had started. Sundaram Leadership ran till 2012, when the fund house took a decision to merge it with Sundaram Growth. And, in 2016, Sundaram Growth was merged into Sundaram Select Focus. While a focused-approach fund need not necessarily be a large-cap scheme (SEBI has left this choice to the AMCs), Sundaram Select Focus has been managed as a large-cap-oriented scheme. With no other diversified large-cap scheme in its basket, the AMC has now rolled out the SBF.

A legacy brought to a close

The question is: if the fund house shut down both its large-cap schemes in the past, what’s the guarantee that SBF will survive and thrive? To answer this question, let’s dwell on the fund house’s past to see what really happened.

Chennai-based Sundaram mutual fund was one of the industry’s quiet performers. Between April 1, 2004 and December 31, 2007, both Sundaram Growth (48 percent returns) and Sundaram leadership (60 percent returns) did well, as per Value Research figures. Large-cap funds gave 41 per cent returns, in this period, on an average.

But Sundaram Growth was always a conservative scheme and had limitations. A former mutual fund industry official close to the AMC at the time tells us that the scheme had in-built restrictions to ensure it didn’t take undue risks. Not more than five percent of the scheme’s corpus could be invested in a single company. And if the stock price rose and the exposure grew to, say, 6-7 percent of scheme’s corpus, then the scheme had to book profits and bring the single-scrip exposure down to under five percent. The strategy worked well in the year 2000 when many of its peers got punished due to high concentration in information technology stocks. IT stocks crashed that year. The flipside: this also restricted the scheme’s upside and Sundaram Growth Fund could never set the charts on fire.

Where the fund house gained its popularity was in the mid and small-cap segments with former chief investment officers such as Anoop Bhaskar who was one of the earliest successful mid-cap managers. Anoop now heads equities at IDFC mutual fund. Between April 1, 2004 and December 31, 2007, Sundaram Mid Cap Fund gave 64 percent returns.

In 2004, Sundaram Leadership Fund was launched with a more focused approach in picking potential large-cap winners. After identifying the right sectors, it invested at least 65 percent in the leaders (the top two or three companies in the segment). The idea was to invest in scrips with minimal downsides and good businesses. Although the scheme did reasonably well, it didn’t attract enough investors. When it was merged into Sundaram Growth in 2012, its corpus was barely Rs 112 crore.

Not being a chart topper also hurt Sundaram Growth Fund’s prospects. When this scheme was merged with Sundaram Select Focus in 2016, its corpus was just as tiny – just Rs 210 crore after a run of 20 years. “It was a difficult choice to shut the fund. It’s difficult to run the fund without a great legacy”, says S. Krishnakumar, Chief Investment Officer-Equity, Sundaram Mutual Fund.

Consolidation in the air

Although the capital market regulator, Securities and Exchange Board of India, clamped down on the industry hard in 2018 by formalizing 36 mutual fund categories and mandating only one scheme per category, it had been nudging fund houses to consolidate their number of schemes for many years. After 2013, SEBI in fact went slow in giving approvals to fund houses for launching new open-ended funds to avoid duplicity. That’s also one reason why many fund houses, including Sundaram MF, took to rolling out closed-end funds after 2013. Krishnakumar says that like many other fund houses, Sundaram MF also took a good hard look at its own set of schemes and decided to merge its small-sized funds. Sundaram Growth, therefore, got merged into Sundaram Select Focus which, by then, had become the AMC’s main large-cap offering.

Change in focus

Winds of change had, in the meantime, started to blow at Sundaram MF. Long known for its strengths in managing mid and small cap funds, the fund house decided to re-energise its large-cap business. Krishnakumar tells us that aside from strengthening it fund management team by hiring fund managers like Rahul Baijal (SBF’s fund manager), the fund house also incentivised its research team to pick large-cap winners. “It’s more rewarding for any research analyst to pick a multi-bagger and that usually comes from mid and small-cap stocks. But a fund house must sensitise analysts that a 30-40 percent gain in a large-cap stock is just as good as a 100 percent gain in mid-cap stock,” he says.

Krishnakumar add: “Even in large-caps, by identifying longer-term themes, we have picked winners such as Bajaj Finance and a few insurance companies. Also, being ahead like in fast-moving consumer good companies, pharmaceuticals or software, our analysts have been able to help us generate significant alpha in the last four years.”

With SBF, the fund house hopes to finally strike gold in the large-cap segment. Will it succeed? Only time will tell.

The scheme opens for subscription on September 17 and closes on September 30, after which it becomes open-ended.