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Discover investment opportunities through MFs - Outside View by PersonalFN
Discover investment opportunities through MFs

"Opportunity is a haughty goddess who wastes no time with those who are unprepared." - George Clason.

The aforementioned quote by the famous soldier, businessman and writer - George Clason, cites how important it is to assess opportunities. And in our opinion it is rather relevant even when we invest in the equity markets.

The equity markets are often considered tantalising by many investors worldwide, as they provide opportunities to create wealth over the long-term. At a social gathering many of you investors may have come across individuals talking about the stock markets and opportunities therein - be it stocks, sectors and market capitalisations (i.e. large caps, mid caps and small caps). And mind you everyone has their own view on them! For example, some may perceive tremendous opportunities in the infra space, while others may foresee it in the banking and financial services space. Similarly within sectors as well some may find the large cap space to be more promising and robust, while others may be exuberant and invest in the mid cap space.

We believe one needs to have thorough understanding about the dynamics of each sector and trait of market cap segment to gain in the long run. It is noteworthy that assessing opportunities within sectors and market cap segment is not as simple as what the conversation at social gathering perceives it to be. It is rather a complex exercise which requires exhaustive research and analysis to be performed on the following:

  • Economy
  • Industry
  • Companies (under each respective industry(s) and across market cap segments)
While we aren't undermining your abilities to perform this exhaustive research, let us apprise you that it requires incessant efforts, which asks for ample time at your recourse thus enabling you to build a portfolio of quality stocks - across sectors and market caps, and provide the benefit of diversification. For those who possess neither the acumen nor have ample time at their recourse to cite promising investment opportunities - be it stock specific, sector specific or market cap wise; "opportunities style" mutual funds can be of help.

"Opportunities funds" as the name suggests invest in stocks of companies across market cap segments (large cap, mid cap, small cap) and across sectors. Due to their flexible investment style, these funds stand a better chance to benefit from attractive investment opportunities in various market segments. However in practice, this depends mainly on the fund manager's expertise in identifying and tapping promising investment opportunities well before others. However, it's noteworthy that a well-managed opportunities fund can add significant value to ones portfolio over the long-term.

How opportunities style mutual funds have fared?
Scheme Name 6-Mth (%) 1-Yr (%) 2-Yr (%) 3-Yr (%) 5-Yr (%) Since Inception (%) Std. Dev (%) Sharpe Ratio Portfolio Turnover Ratio (%) Expense Ratio (%)
Reliance Equity Oppor (G) -3.6 -14.5 13.9 20.9 12.3 20.2 9.21 0.16 70.00 1.85
UTI Oppor (G) -2.6 -7.9 8.1 19.7 13.6 16.7 7.84 0.16 57.14 1.94
Mirae Asset India Oppor (G) -8.3 -13.2 8.6 19.4 - 12.0 9.59 0.14 153.00 2.39
DSPBR Opp (G) -8.1 -17.8 5.6 13.5 9.8 19.7 7.97 0.10 79.00 2.15
Fidelity India Spl.Situations (G) -9.0 -16.8 5.5 10.7 8.5 9.8 9.83 0.08 29.00 2.11
Kotak Opportunities (G) -8.6 -19.9 1.8 9.1 10.1 22.1 9.05 0.06 142.56 2.05
ING Domestic Opportunities (G) -5.3 -16.8 1.8 8.5 7.1 18.7 8.73 0.06 110.40 2.50
Tata Equity Opportunities (G) -5.3 -18.3 2.0 7.3 7.7 11.2 9.34 0.05 106.60 2.31
L&T Opportunities (G) -12.4 -21.5 -2.2 7.1 10.2 10.0 11.19 0.05 55.00 2.50
HSBC India Opp (G) -7.8 -14.1 2.5 6.6 5.8 16.5 7.36 0.04 137.00 2.39
Franklin India Opp (G) -9.7 -17.4 0.7 6.1 4.5 9.3 8.46 0.04 239.66 2.32
DWS Investment Opp (G) -9.3 -23.6 -1.4 4.9 9.3 16.6 8.50 0.02 71.00 2.50
Birla SL Special Situations (G) -11.7 -24.0 -3.9 4.3 - -4.5 9.46 0.03 65.00 2.34
LIC Nomura MF Opp (G) -15.0 -21.0 -3.6 2.3 1.4 7.4 8.98 0.02 15.00 2.08
Category average -8.3 -17.6 2.8 10.0 8.4 13.3 8.96 0.07 - -
BSE-100 -12.9 -19.8 -1.2 6.5 6.7 - 9.59 0.04 - -
BSE-200 -12.8 -20.4 -0.9 7.0 6.7 - 9.70 0.04 - -
BSE-500 -12.1 -20.5 -0.5 7.1 6.6 - 9.83 0.04 - -
S&P CNX 500 -12.0 -19.9 -1.1 7.1 6.2 - 9.59 0.04 - -
S&P CNX Nifty -13.9 -19.1 -0.9 5.8 6.7 - 9.11 0.03 - -
(NAV data is as on September 25, 2011. Standard Deviation and Sharpe ratio is calculated over a 3-Yr period.
Risk-free rate is assumed to be 6.37%)
(Source: ACE MF, PersonalFN Research)

So far as revealed by the table above opportunities style mutual funds, have delivered appealing returns. When assessed over a 3-Yr time frame most opportunities funds have created wealth for their investors. But Reliance Equity Opportunities Fund, UTI Opportunities Fund, Mirae Asset India Opportunities Fund, DSPBR Opportunities Fund and Fidelity India Special Situations Fund occupy the top-5 place, as they have been able to clock appealing returns keeping their risk (as revealed by the Standard Deviation) well under control. This in turn has also enabled them to strike a better Sharpe Ratio, making them a low risk-high return investment proposition in the category. Even if we assess average returns of the top-5 funds in the table above, they have delivered on an average a return of 16.8% over a 3-Yr time frame (which is outperforms the category average of 10.0%).

At present there have been some funds such as Kotak Opportunities Fund, ING Domestic Opportunities Fund, Tata Equity Opportunities Fund and L&T Opportunities Fund which have provided middling returns, though they have outperformed their respective benchmarks indices marginally. However, their performance is nothing to vie for, as they have stroked mediocre risk-adjusted return (as revealed by their Sharpe Ratio). Similarly, the ones landing in the bottom-5 in the table above are the ones who have failed to outperform even their respective benchmark indices, and hence worthless to consider unless they prove on performance.

Performance across market cycles
Schemes / Index Returns in Bull Phase (%) Returns in Bear Phase (%) Returns in Bull Phase (%)
01-Aug-05 to 09-Jan-08 to 09-Mar-09 to
09-Jan-08 09-Mar-09 25-Sept-11
Reliance Equity Oppor (G) 51.20 -58.10 50.89
UTI Oppor (G) 43.10 -49.16 40.07
Mirae Asset India Oppor (G)* - -45.20 47.93
DSPBR Opp (G) 57.11 -55.81 35.73
Fidelity India Spl.Situations (G)* 45.87 -58.25 42.53
Kotak Opportunities(G) 63.67 -58.60 32.67
ING Domestic Opportunities (G) 52.74 -57.80 32.75
Tata Equity Opportunities (G) 58.15 -61.70 34.70
L&T Opportunities (G) 59.56 -62.96 38.10
HSBC India Opp (G) 57.23 -55.42 26.37
Franklin India Opp (G) 53.35 -58.41 29.39
DWS Investment Opp (G) 64.61 -55.51 27.02
Birla SL Special Situations (G)* - -53.32 28.42
LIC Nomura MF Opp (G) 43.88 -56.84 22.15
Category average** 54.21 -56.22 34.91
BSE-100 52.45 -58.08 32.63
BSE-200 51.65 -59.00 33.67
BSE-500 52.31 -60.43 34.66
S&P CNX 500 49.60 -58.34 31.58
S&P CNX Nifty 50.34 -53.48 28.50
* These funds have been incepted during the aforementioned market phases, and hence
returns have been calculated from their respective inception date.
**Category average is the simple average of all the funds in the peer set above.
(Source: ACE MF, PersonalFN Research)

The study of performance across market cycle also makes it quite distinct that funds such as Reliance Equity Opportunities Fund, UTI Opportunities Fund, Mirae Asset India Opportunities Fund, DSPBR Opportunities Fund and Fidelity India Special Situations Fund (which have occupied the top-5 place so far), have not only been able to accelerate the process of wealth creation during the bull phases of the Indian equity markets, but also arrested the downfall during the bear phase of the Indian equity markets when they experienced turbulence due to sub-prime mortgage crisis in the U.S.

On the other hand funds such as Kotak Opportunities Fund, ING Domestic Opportunities Fund, Tata Equity Opportunities Fund and L&T Opportunities Fund; which did perform well during the exuberant bull phase of the Indian equity market (i.e. from August 1, 2005 to January 9, 2008), fell violently during the bear phase of the Indian equity markets. And even today - in the present bull phase, they haven't been able to accelerate the process of wealth creation for their investors. Similarly, the ones landing in the bottom-5, too did perform well during the bull phase prior to the pre sub-prime mortgage crisis, but were hammered during the bear phase, and in the bull phase post the sub-prime mortgage crisis they have delivered quite unappealing returns.

Hence, it's imperative to understand the underlying portfolio which an opportunities fund holds before you get lured only by the returns chart exhibited by mutual fund distributors / agents / relationship managers. Remember there's more to selecting a winning mutual fund than mere returns. While accelerating the process of wealth creation is your objective, it is vital to assess whether the fund manager(s) of the respective mutual funds have bought promising investment opportunities for you. And remember that's exactly why you have invested in mutual funds and entrusted the job to the fund manager.

Portfolio Characteristics and strategy:

As mentioned earlier, opportunities funds hold a diversified equity portfolio of stocks across market cap segments (i.e. large caps, mid caps and small caps) and sectors which pose to offer promising investment opportunities. Being fluid in their investment approach and intending to tap promising investment opportunities, they however, do churn their portfolio quite often in an attempt to deliver luring returns to their investors. But, the holding period typically also depends upon how the fund manager and his research team perceive long-term value in respective stocks. As far as holding total number of stocks in the portfolio is concerned, they can be either be over-diversified or concentrated depending upon how the fund manager (as per the investment mandate, processes and systems) is allowed to position the portfolio. For example - just to apprise you, DSPBR Opportunities Fund holds the most diversified portfolio of 96 stocks, whereas HSBC India Opportunities Funds holds a concentrated portfolio of 31 stocks.

Top 10 Stocks
Name of the company Market cap % of holding*
HDFC Bank Ltd. Large cap 4.8
Reliance Industries Ltd. Large cap 4.5
ITC Ltd. Large cap 4.3
Infosys Ltd. Large cap 4.2
Bharti Airtel Ltd. Large cap 3.8
ICICI Bank Ltd. Large cap 3.8
TCS Ltd. Large cap 2.8
Larsen & Toubro Ltd. Large cap 2.7
HDFC Ltd. Large cap 2.4
Hindustan Unilever Ltd. Large cap 1.8
Top 10 sectors
Stock and sector holdings are as on August 31, 2011.
Consolidated holdings of all opportunities funds in the peer comparison table, have been taken for top-10 sector calculation.
*Top-10 stocks are also consolidated for all the opportunities funds in the peer comparison table
(Source: ACE MF, PersonalFN Research)

At present the latest portfolio (as on August 31, 2011) reveals that most opportunities style diversified equity fund have maintained a large caps bias in their top-10 holdings, but their overall portfolio also reveals indulgence in the mid and small cap space as the fund managers may have cited promising investment opportunities within them as well. Similarly, their sector classification reveals that most opportunities funds have evinced firm interest in the bank stocks assessing valuations in them appearing attractive (as banking stocks felt the brunt of RBI's anti-inflationary stance) along with recognising the fact that India's banking and financial services sector is far more regulated (and thus robust!). They also have betted strongly in India's consumption story as revealed by their exposure in the consumer non-durable sector.

The verdict...

We believe that for those having quest to tap promising investment opportunities in their journey of long-term wealth creation, opportunities styled diversified equity funds can be appropriate, especially if they neither possess the acumen nor have ample time at their recourse to cite promising investment opportunities - be it stock specific, sector specific or market cap wise.

But while you invest in opportunities styled diversified equity funds and entrust the job to the fund manager, it is vital to study the investment mandate, processes and systems followed by the respective fund as well as the fund house. Moreover, while evaluating the performance of opportunities styled diversified equity funds it is important to assess the fund's performance across market cycles and the underlying portfolio of the respective funds which will drive its performance in the long-term. Also the fund should ideally be a low risk-high return investment proposition for it to strike a superior risk-adjusted return while it aims at creating wealth for its investors.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.


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