The equity market has been very volatile in the last two months, with the Nifty falling 1,000 points from its all-time high. Midcap and small cap stocks have been underperforming for more than a year now. Nifty Midcap 100 Index has fallen 18% in the last 1 year, while Nifty Small Cap 100 Index has fallen nearly 29%.
Deep corrections in the past have provided excellent investment opportunities. Investors can use these corrections tactically to increase their asset allocation in equities. As per several investment experts, selective stock picking in volatile markets can be very rewarding in the long run. As such, focused equity funds which invest in relatively small number (less than 30 stocks) of high conviction stocks can be good long term investments in the current market conditions. While focused funds are less diversified (higher concentration risk) than other types of equity funds, these schemes have the ability to generate superior alphas through superior stock selection.
In this post, we will review Sundaram Select Focus Fund, one of most consistent performers in the focused funds category.
Sundaram Select Focus Fund
The scheme was launched in July 2002 and has Rs 1,013 Crores of Assets under Management (AUM). The expense ratio of the fund is 2.4%. It is a large cap biased focused equity fund and the scheme benchmark is Nifty 50 TRI. The chart below shows the annual returns of Sundaram Select Focus fund over the last 5 years. You can see that the scheme was able to beat the benchmark in most years.
The chart below shows the NAV movement of the scheme over the last 5 years.
The chart below shows the 3 years rolling returns of Sundaram Select Focus Fund versus its benchmark Nifty 50 TRI over the last 5 years. We are looking at 3 year rolling returns because investors should have a minimum 3 year investment horizon for equity funds.
You can see that, the fund was able to beat its benchmark in most periods over the last 5 years. The average 3 year rolling return of the scheme over the last 5 years was 11.3%, while the median 3 year rolling return of the scheme over the last 5 years was nearly 11%. The maximum 3 year rolling return of the scheme over the last 5 years was 16.4%, while the minimum 3 year rolling return of the scheme over the last 5 years was 6.2%.
The chart below shows the 3 year rolling returns consistency of the fund over the last 5 years. The scheme gave 3 year annualized returns of more than 8% nearly 92% of the times over the last 5 years. The chart below shows the 3 year rolling returns of the scheme versus the focused equity funds category over the last 5 years.
You can see that the fund has consistently been outperforming the category from mid 2015. We think, consistency is one of the most important long term performance attributes of a mutual fund scheme.
Rahul Baijal is the fund manager of this scheme. The fund manager invests in a maximum of 30 stocks across sectors with the objective to deliver consistent and steady returns over time with limited volatility. At any time, the fund would have more than 80% of the corpus invested in well managed and established large cap companies (Top 100 companies by market capitalization). The fund manager follows a bottom up approach in stock picking based on in-house research and the fund manager’s conviction. The scheme portfolio is generally focused around 3-4 themes. The investing style of the fund manager has a GARP (Growth at Reasonable Price) bias.
Key themes of the fund manager are as follows:-
Discretionary Consumption: Structural attractiveness due to higher incomes, improving consumption patterns and rising penetration. In relation to this theme, the fund manager is overweight on sectors like Consumer durables, Retail Banking etc.
Domestic Cyclical Recovery: The Indian economy is expected to witness revival in economic growth which will augur well for cyclical stocks. In relation to this theme, the fund manager is overweight on corporate lenders and select industrial stocks.
Government Reforms: From the perspective of Government reforms the fund manager is overweight on Oil Marketing Companies and companies which are beneficiaries of Government reforms and spending
Weak Outlook on global sectors: In this regard the fund manager is underweight on metals, US Focused generic drugs and ITs.
The chart below shows the major sector allocations and top holdings of Sundaram Select Fund portfolio.
Lump Sum and SIP Returns
The chart below shows the growth of Rs 1 lakh lump sum investment in the Sundaram Select Focus Fund’s growth option over the last 5 years. Your investment in the scheme would have grown more than 1.5 times in value over the last 5 years, despite the weakness and volatility in the market over the last 12 months or so.
The chart below shows the returns of Rs 5,000 monthly SIP in the Select Focus Fund’s growth option over the last 5 years. With a cumulative investment of Rs 3 Lakhs, you could have accumulated a corpus of nearly Rs 4 Lakhs in the last 5 years. The annualized SIP return (XIRR) over the last 5 years was 8.7%.
Dividend Track Record
Sundaram Select Focus Fund has been paying quarterly dividends for the last 3 years and has a strong dividend track record for the last 2 years or so. Annual dividend yield (10%+) is quite good. The table below shows the dividend track record of the scheme.
Sundaram Select Focus Fund has completed 17 years. In our view, its risk adjusted performance is quite good. While the fund has given good long term returns, it has also limited downside risks for investors.
For example - in the last 3 months when Nifty fell 6.6% and focused funds category gave -6.2% average returns, Sundaram Select Focus Fund gave -3.8% returns. If you are looking for portfolio stability and long term capital appreciation, then you can evaluate Sundaram Select Focus Fund. You can invest in the fund both in lump sum and SIP modes; if you are worried about high valuations currently, then you can consider doing a 3 to 6 month Systematic Transfer Plan (STP). Investors should consult with their financial advisors if Sundaram Select Focus Fund is suitable for their investment needs.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.