July 10, 2015

Concentrated Equity Mutual Funds

RETAIL RESEARCH

Relatively better Performing Concentrated Equity Mutual Fund Schemes:

Trailing Returns (%)

Rolling Returns (%)

Total No
of
Equity
Holdings

6
Months
Absolute

1
Year
CAGR

3
Years
CAGR

5
Years
CAGR

6
Months
Absolute

1
Year
CAGR

2
Years
CAGR

Various Market Cycles (%)

Scheme Name

Type of
Mkt Cap

Latest
Corpus
(Rs
Crs)

Birla Sun Life India Opport Fund - B (G)

Multi-cap

94

30

6.80

25.61

31.01

15.82

9.43

18.22

DSP BR Focus 25 Fund (G)

Large-cap

423

25

8.79

30.46

25.42

11.41

6.01

13.12

9.78

9.60

-22.60

3.05

62.12

-5.05

4.64

ICICI Pru Top 200 Fund - (G)

Large-cap

873

30

5.26

22.76

25.52

14.00

7.90

15.36

10.33

9.95

-26.42

12.72

57.85

-5.23

4.33

Religare Invesco Dynamic Equity Fund (G)

Multi-cap

7.15
17.34

22.56

12.53

14.35

11.86

3.35

56.59

39.65
-

-3.10

51.91

7.10
27.96

15.34

Multi-cap

15
19

18.86

Motilal Oswal Most Focused Multicap 35 (G)

54
1687

1.15

4.17

SBI Small & Midcap Fund (G)

Small-cap

369

23

11.91

56.97

41.97

23.14

11.81

25.35

16.80

16.50

-22.10

10.46

102.23

-5.40

5.23

S&P BSE Sensex

2.09

10.97

18.05

9.60

6.08

11.31

8.27

8.61

-22.99

11.36

41.11

-10.60

CNX Nifty

2.20

11.85

17.85

9.72

6.00

11.29

8.45

8.84

-23.39

9.93

44.07

-10.45

CNX Midcap

6.19

20.84

22.19

10.13

8.24

16.31

9.67

9.14

-31.78

4.85

65.06

-6.13

S&P BSE 200

3.66

14.05

19.03

9.45

6.55

12.23

8.33

8.47

-26.41

9.44

47.73

-9.20

S&P BSE 500

3.39

13.44

18.88

9.19

6.52

12.21

8.00

8.08

-27.07

8.61

48.85

-9.13

Standard
Deviation
(Monthly)

3
Years
CAGR

Oct '10
To Dec
'11
CAGR

Dec '11
To Sep
'13 CAGR

Sep '13
To Jan '15
CAGR

Jan '15
To Jun
'15 Abs

9.74

6.90

-26.83

18.16

62.11

-2.26

4.00

Benchmark:

Average:
Schemes having equity holding of below 20

17

8.69

31.77

28.34

15.13

9.13

17.95

11.78

10.51

-24.21

10.55

65.59

-4.31

4.42

Schemes having equity holding of below 25

21

5.62

21.10

22.50

11.86

7.43

15.08

10.74

9.93

-24.49

9.09

54.07

-6.50

4.49

Schemes having equity holding of below 30

24

5.29

19.28

20.36

11.14

8.42

18.11

10.94

8.91

-24.29

6.40

52.83

-6.28

4.58

Schemes having equity holding of above 30

52

5.41

23.72

25.56

14.08

9.28

18.67

13.00

12.10

-23.75

8.56

66.06

-7.02

4.69

Note: NAV values are as of June 26, 2015. Rolling Returns are calculated from the last 7 years NAV history. Standard Deviation (Monthly) is calculated from last 3 years data.

Summary:

Concentrated equity mutual funds are from equity oriented schemes following focused investment strategy of constructing their portfolio with 30 stocks and
below aiming to earn greater returns at optimum level of risk. The normal diversified equity mutual funds comprise more than 30 stocks in their portfolio
aiming to reduce the volatility in the portfolio return.

In general, investing in 10 to 30 stocks will tend to provide adequate diversification to even out the non-systematic risk rather than holding more stocks.
Modern portfolio theory has also proved that inclusion of stocks up to 20 in the portfolio helps in reducing the volatility.

RETAIL RESEARCH

The concentrated equity mutual funds deliver relatively better returns during rising market scenario. On the other hand, their concentrated mandate makes
them to underperform during downtrends. Over the long run, these schemes (barring 1-2 schemes) did not deliver great outperformance. However, the
schemes with the portfolio holding of less than 20 stocks showed outperformance in the recent bull market that started since Sep 2013.

The risk as measured by Standard Deviation for concentrated equity mutual funds is more or less equal to that of the diversified equity funds.

Matter of diversification:

As far as Equity oriented mutual funds are concerned, diversification plays an important role which mitigates the risk and volatility of the return as the
investments are spread across the stocks. Equity diversified funds generally hold more than 40 stocks (an average of 52 stocks as taken for our study) in their
portfolio and such diversification helps the investors to achieve balanced returns or higher returns over the periods.

The diversification strategy works out well in a quality portfolio when even if one stock generates negative returns, the other outperforming stock offsets the
loss and helps to achieve balanced returns over periods.

On the other hand, there are certain equity mutual funds which follow concentrated approach of holding less than 30 stocks in the portfolios. These funds
believe that inclusion of 10-30 stocks can give you adequate diversification to even out the non-systematic risk (risk that can be eliminated through
diversification). However, the portfolio of these funds could be more volatile than broadly diversified portfolios and has the potential to make a bigger impact
on the fund's returns (by taking higher risk).

Portfolio composition plays an important role in the success of any fund. In the case of concentrated funds the portfolio composition is considered even more
crucial as there is not much margin for error or misjudgment as equities are bought in high proportions and fund may suffer severe losses if its bets dont work.
There is no thumb rule of how much stocks an equity scheme should hold in their portfolio.

While talking about Sensex, the Key benchmark index in India, constitutes with 30 stocks, is considered as broader market indicator among the investments.
Further, if we look at the performance of the Sensex and Nifty which are having vast difference in the total number of constituents with 30 and 50 stocks
respectively, showed posting almost similar returns in all the time frames. Having a concentrated portfolio creates a little bit of additional volatility, but it also
increases the odds that a strong performer will have an outsized positive impact on the account. Building a widely diversified equity portfolio merely raises
transaction costs and leads to diluted and mediocre performance.

RETAIL RESEARCH

Relative performance based on point to point or trailing returns (%):

Relative performance based on Rolling returns (%):

The above chart shows the outperformance of the schemes with the equity holding of below 20 in
their portfolio. As mentioned, concentrated equity schemes to tend to perform well during rising
market condition. On the other hand, concentrated schemes with less than 30 stocks
underperformed the equity diversified schemes in most of the time frames.

The rolling returns performance shows the outperformance of the diversified equity schemes
over the periods. Though the concentrated bets perform well during rising market, they fail to
generate better returns during falling scenario.

Relative performance during various equity market cycles (%):

Risk as measured by Standard Deviation:

The above chart displays the outperformance of the concentrated schemes with less than 20
stocks over other mentioned categories.

Risk as measured by Standard Deviation shows almost similar risk involved in the all the
categories i.e. concentrated and diversified equity schemes.

RETAIL RESEARCH

Relatively better performing schemes from concentrated equity segment:

SBI Small & Midcap scores over other schemes as it showed outperformance in the recent midcap rally.

The portfolio of the schemes in the concentrated equity category is normally well structured based on either quant model or fund manager conviction. The funds such
as Reliance Quant plus follow quant based model while the portfolios of other schemes are structured by the discretion of the fund managers. DSPBR Focus 25 invests
in a portfolio of about 25 companies which are amongst the top 200 companies by market capitalisation. JM Core 11 holds a concentrated portfolio of stocks with
minimum exposure to each stock close to 9%.
The concentrated schemes (i.e, schemes that holds less than 30 stocks) have managed corpus of Rs. 14,674 crore verses Rs. 2,50,233 crore of the overall equity
diversified category. Expense ratio for these schemes are somewhat higher of 2.66% compared to 2.59% of overall equity diversified category. 1% of Exit load is
applicable for the most of the schemes if redeemed within 1 year.
We feel that diversified schemes are a better option for SIP investment, while lumpsum investment (especially at or close to market bottoms) may be made in
concentrated schemes after proper selection.

RETAIL RESEARCH

Analyst: Dhuraivel Gunasekaran (dhuraivel.gunasekaran@hdfcsec.com)

Source: NAVIndia & ACEMF

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This report has been prepared by the Retail Research team of HDFC Securities Ltd. The views, opinions, estimates, ratings, target price, entry prices and/or other parameters mentioned in this document may or
may not match or may be contrary with those of the other Research teams (Institutional, PCG) of HDFC Securities Ltd.

RETAIL RESEARCH