A focused bet on quality stocks
Asset manager Motilal Oswal would be graduating from passive fund management in equity mutual funds to a more active strategy, with the launch of its new equity fund. Termed MOSt Focused 25, this open-ended equity fund will hold a compact portfolio of not over 25 stocks with a growth-oriented approach to investing. The fund’s offer opened on April 22 and will close on May 6.
MOSt Focused 25 will be a multi-cap fund and to that extent will be no different from the rest of the diversified funds available in the market today. But the fund has a few unique propositions in terms of its investment style and strategy.
25-stock portfolio: For starters, the fund states that it intends to stick to a 25-fund portfolio at all times. According to various theories, the benefits of diversification (which reduces a portfolio’s standard deviation and aids better risk-adjusted return) are lost beyond a certain number of stocks (held) as systemic risks prevail.
In the Indian context, most funds currently have a well-diversified portfolio. According to data, 61 per cent of equity assets managed in the Indian equity mutual fund industry are held by funds that have a 50-plus stock portfolio.
This indicates that a focused portfolio approach is not a well-trodden path as yet. In fact, there are only a handful of funds that have a less than 25-stock portfolio.
But last year, Axis Mutual launched one such fund, while DSP BlackRock too has a similar fund launched in 2010. Yet, these funds have different strategies. The former can hold as low as 65 per cent in equities and will invest 90 per cent of its equities in the top 200 companies. That means a good proportion would be in large-cap stocks. DSP BR Focused can invest a little more outside the top 200 companies and yet, it will have a ‘value perspective’ while investing. The latter also uses a bit of derivative strategy as a hedge.
Outside top 200: MOST Focused 25 will seek to invest 90 per cent of its funds in equity. While it will invest at least 65 per cent in stocks that are in the top 200 in terms of market capitalization, it can invest as much as 25 per cent in stocks outside the above range. That means it will have the flexibility to invest almost a fourth of its assets in mid and nascent large-caps too, provided their market cap is not less than Rs 1,400 crore.
It has also explicitly stated that the ‘growth’ opportunity will take precedence over valuations. It means that the fund may not exit a stock just because valuations are no longer cheap; if it sees growth potential in the stock. That is in contrast to the strategy of DSP BR Focused.
Besides these features, the fund will seek to follow a buy and hold approach and avoid unnecessary churn. It will also hold companies/sectors that have endured ‘economic moats’. That means the business should provide clarity in terms of being a going concern and have less obstacles to growth. For example, stocks from sectors driven by too many policy uncertainties or companies that are too reliant on global events/markets may not fit in to the fund’s portfolio.
One key operational feature of this fund is that it will have no exit load. This may come as a surprise, given that the fund’s buy and hold strategy requires some holding period and not having an exit load may cause unforeseen redemptions.
But it also reflects the fund’s confidence in its own performance as a poor performance can see quick exits, what with no exit load.
MOSt Focused 25, as the name suggests will be a focused fund. The fund can have up to 25 per cent (or 1.5 times benchmark’s sector weight) of its assets in a single sector, and up to 10 per cent of its NAV in a single stock. It would also invest a minimum of 2.5 per cent in a single stock. Now, that means quite a bit of focused exposure. Hence, investors would have to take on the risks associated with such bets.
That said, a long-term investment perspective can go to reducing such risks. To some extent, this fund may look like a typical PMS (Portfolio Management Services) -managed fund.
The fund appears to have timed this launch well, given that a number of stocks are trading below their average price earnings multiple. According to the fund, the Sensex is trading below its 15-year average P/E multiple (as of March 2013). That means there is scope for returns on re-rating.
For those who believe that gold or deposits make for better investments, the fund house makes an interesting presentation on how equities score over other asset classes on an inflation-adjusted basis (see image below).
Motilal Oswal itself has a long track record in PMS. Its experience in PMS may come in handy for running this fund. The group’s flagship value-focused PMS fund delivered 25 per cent annually since its inception in 2003, while another focused PMS fund managed 15 per cent annually in the last five years. Less than 20 diversified equity funds managed double-digit returns in the last five years.
The fund house currently manages unique ETFs in the large and midcap space, besides a Nasdaq 100 -focused ETF, gold ETF and a 10-year gilt fund.
MOSt focused 25 will be managed by Taher Badshah who has 18 years of experience in fund management and research. He has been with Motilal Oswal AMC since 2010.
Investors may note that we do not currently have a call on this new fund offer, given that the fund has no track record to go by.
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