Funds with concentrated portfolios aim to generate higher alphas or outperformance versus the benchmark index, through stock picking abilities of their fund managers. Typically, these funds tend to be more volatile relative to more diversified funds. However, over the long term in a secular bull market, these funds have the potential to give superior returns. The DSP BlackRock Focus 25 fund, a diversified large and midcap fund, gave nearly 60% returns on a trailing basis in the last one year. The chart below shows the trailing annualized returns of the fund versus Sensex over the past 3 years (NAVs as on Apr 7, 2015).
If we look at the performance of some the focused funds over the past three years we can see that these funds have given good returns, as shown in the table below (NAVs on April 7, 2015).
While ICICI Prudential Focused Bluechip Equity Fund and Reliance Focused Large Cap Fund are primarily large cap oriented funds, which explains their lower returns relative to the other funds, DSP BlackRock Focus 25 Fund has clearly been an outstanding performer in the last one year.
The DSP BlackRock Focus 25 Fund was launched in June 2010 and has an AUM base of
र 360 crores. In the initial years, the performance of the fund was relatively modest, which is not unexpected from funds with concentrated portfolio. However, the fund delivered outstanding returns in 2014 and is continuing to deliver outperformance in 2015. The chart below shows the annual returns of the fund from 2011 to 2015 (year to date).
Till the end of 2014, the DSP BlackRock Focus 25 fund was managed by veteran fund manager Apoorv Shah. Now the fund is managed by Harish Zaveri and Jay Kothari. The fund managers have made concentrated bets in high conviction stocks. From a market capitalization perspective, the fund portfolio has a large cap bias with over 60% of the fund portfolio invested in large cap stocks. In terms of sectoral allocation of the portfolio, the portfolio is strongly oriented to cyclical sectors like Banking, Automobiles, Construction, Oil and Gas etc. As the capex cycle picks up in the economy the portfolio is expected to deliver stronger returns. From a company concentration standpoint, the portfolio is quite concentrated with the top 10 holdings comprising over 50% of the fund portfolio. The top 5 holdings, BPCL, Britannia, HDFC Bank, Maruti Suzuki and Eicher Motors comprise a little over 32%.
One of the questions that investors have regarding focused funds is, whether these funds are really diversified funds or if they fall within the gamut of sector funds. While it is true that, given its concentrated portfolio holdings, the DSP BlackRock Focus 25 Fund is less diversified than other funds in the diversified equity category, it cannot be classified as a sector fund because the sectoral allocation of the fund covers a wide range of sectors. Though banking and finance constitutes a significant portion of the portfolio holding, the fund has significant allocations to other sectors.
Risk and Return
In terms of risk measures, the volatility of the DSP BlackRock Focus 25 Fund is on the higher side, relative to the average volatility of large fund oriented diversified equity funds. This is consistent with the concentrated portfolio holding of this fund. Investors need to have a long investment horizon to get maximum return from this fund. Further since focused funds tend to be more volatile than more diversified funds, investment through Systematic Investment Plan (SIP) is the ideal mode of investing for such funds, since the investor can take advantage of the volatility in NAVs.
Strong SIP returns of DSP BlackRock Focus 25 Fund
The chart below shows the returns since inception of Rs. 3000 invested monthly through SIP in the DSP BlackRock Focus 25 Fund (growth option). The SIP date has been assumed to first working day of the month. The chart below shows the SIP returns of the fund. NAVs as on April 7, 2015.
The chart above shows that a monthly SIP of
र 3,000 started at inception of the DSP BlackRock Focus 25 Fund (growth option) would have grown to nearly र 3 lacs by April 7 2015, while the investor would have invested in total about र 1.8 lacs. The SIP return (as measured by XIRR) since inception of the fund is nearly 21%.
DSP BlackRock Focus 25 Fund is about to complete 5 years in June. Though the performance of the fund was relatively modest in the first 2 – 3 years, the fund manager’s conviction paid off in 2014 and the fund has delivered strong returns. The fund is ideal for investors looking for capital appreciation over a long time horizon for a variety of financial objectives. As discussed earlier, given the concentrated portfolio of this fund, investors in this fund should be prepared for volatility. However, if they are invested over a long time horizon, investors can expect good returns. Investors should consult with their financial advisors if DSP BlackRock Focus 25 Fund is suitable for their investment portfolios.