Focused equity funds follow a tight and concentrated investment approach holding up to 30 stocks in their respective portfolios. Even before market regulator Securities and Exchange Board of India (SEBI) introduced the new category of focused funds, there were many schemes in the market that followed such a concentrated strategy. SBI Focused Equity Fund (SFEF) is one among these. It has managed to deliver superior returns since its launch in October 2004. This scheme is part of the MC30: Moneycontrol’s curated basket of 30 investment-worthy mutual fund (MF) schemes.
2/9
SFEF has managed to deliver better risk-adjusted returns of 19 percent since its inception. As mandated, SFEF holds at least 65 percent in equities and follows a multi-cap investment approach. Prior to SEBI’s recategorisation process of May 2018, the fund was called ‘SBI Emerging Businesses Fund’ with higher allocation towards mid- and small-cap stocks. With Rs 28,407 crore, it holds the lion’s share within the category comprising one-fourth of the overall AUM. R. Srinivasan has managed the scheme since 2009.
3/9
SFEF has been managed as a focused fund for over a decade and its stock holdings have been in the range of 20-28 at any point in time. On how a fund with focused strategy can deliver better or matching returns vis-à-vis diversified funds which holding 50-70 stocks, Srinivasan says there are enough research papers available to explain the benefit of diversification that can be achieved with 15-20 stocks. “It is basically about the probability of winning. But the negative side of owning a higher number of stocks is that it impacts returns because you're not owning enough of what you like. A focused fund is also a diversified fund. If I had no liquidity issues, then I would run all my funds as focused funds. Concentrated portfolios are really the ones that Sequoia or Warren Buffett run, where they have only six or seven stocks in their portfolio,” adds Srinivasan. Five-year rolling returns for focused funds and flexi-cap funds were similar across most of the periods.
4/9
It follows a bottom-up approach and is agnostic to sectors, market-cap and benchmark. Srinivasan says that he follows a simple philosophy of buying good businesses, run by good people, and which are available at reasonable valuations. He buys and holds them for longer time frames. That helps the fund deliver better adjusted returns. Performance as measured by 10-year rolling returns calculated over the last 14 years shows that SFEF delivered a compound annual growth rate (CAGR) of 17.7 percent, while the S&P BSE 500 - TRI (Total Returns Index) gave 12.6 percent.
SFEF has done reasonably well during market rallies, even as it contained downsides quite well during bearish phases. However, the scheme has been among the laggards within the category during the current volatile phase that started in October 2021. Srinivasan attributes this to the correction in foreign stocks, such as Netflix, that he holds in the portfolio. SFEF’s foreign exposure came down to 8 percent from 15 percent last year. Secondly, some of the stocks that delivered better returns over the long term did not perform well in the last one year. This includes Bharti Airtel, Muthoot Finance and Divi’s Labs. “Our portfolio is oriented towards quality and growth, which did not do well as the market switched to value,” adds Srinivasan.
6/9
With the highest asset base in the category, SFEF held about half of the portfolio in large-cap stocks. It would be difficult for larger-sized focused funds to take higher exposure in stocks belonging to the mid and small segments. Liquidity is the biggest challenge in the small-cap space. It reduces the flexibility to exit at a reasonable impact cost. That may be a bigger cause for concern in a downturn. Over the past three years, average cash holding has been 8 percent. At times, it has exceeded 10 percent due to the allocation towards derivative exposure.
7/9
Long-term holdings such as Divi's Laboratories, HDFC Bank, Procter & Gamble Hygiene and Health Care and Solar Industries India have paid off well for SFEF. The fund has added stocks such as ICICI Bank, MedPlus Health Services and Delhivery.
8/9
SFEF has not traded much and follows a buy-and-hold strategy. Many of its long-term holdings have been multi-baggers, which rewarded investors well. A low turnover shows the conviction of the fund manager. As of October 2022, SFEF’s turnover ratio was 21 percent, which also includes its derivative transactions.
Investors with a high risk appetite can consider investing in SFEF with a time horizon of seven years and more through the systematic investment plan (SIP) route.
