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L&T Focused Equity Fund: Can Its Focused Approach Pay Off? - Outside View by PersonalFN

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L&T Focused Equity Fund: Can Its Focused Approach Pay Off?
Oct 26, 2018

L&T Focused Equity Fund (LFEF), an open-ended equity scheme, is the latest offering from L&T Mutual Fund. LFEF is a diversified equity scheme following a focused approach while investing in equity and equity related instruments.

LFEF scheme aims to focus only on a maximum of 30 stocks of companies across market capitalization segments i.e. large-cap, mid-cap, and small-cap. Therefore, in that sense, the fund has the flexibility as it follows a conviction-driven or a focused approach.

At present the Large-cap, Mid-cap & Small-cap companies are classified as below:

  • Large-Cap: 1st to the 100th company in terms of full market capitalisation.
  • Mid-Cap: 101st to 250th company in terms of full market capitalisation.
  • Small-Cap: 251st company onwards in terms of full market capitalisation.

As per SEBI regulations, a focused fund is not allowed to hold more than 30 stocks and invest a minimum 65% of its assets in equity and equity related instruments, which exactly what LFEF is following. But, it will also allocate some portion (upto 35% of its total assets) to debt and money market instruments and units of REITs and InvITs (upto 10% of its total assets) from an asset allocation standpoint and to mitigate the risk.

On the risk-return matrix, LFEF owing to its conviction driven or focussed approach while investing in equities would be a very high-risk, very high-return investment proposition, although the fund holds the flexibility to invest across market capitalisation segments.

So, LFEF is suitable for investors with a stomach for very high risk and an investment time horizon of at least 7-8 years while seeking capital appreciation.

Table 1: NFO Details

Type An open-ended equity scheme investing in a maximum of 30 stocks in large, mid and small-cap companies Category Diversified Equity -- Focused Fund
Investment Objective The investment objective of the scheme is to provide capital appreciation by investing in equity and equity related instruments of maximum 30 stocks.

There is no assurance that the objective of the Scheme will be realised, and the Scheme does not assure or guarantee any returns.
Min. Investment Rs 5,000 and in multiples of Re 1 thereafter Face Value Rs 10 per unit
Plans 
  • Direct
  • Regular

Options
  • Growth
  • Dividend (Payout and Reinvestment)
  • *Default option

Entry Load Nil Exit Load In respect of each purchase/switch-in of units, an exit load of 1% is payable if units are redeemed/ switched-out on or before 1 year from the date of allotment.
Fund Manager Mr S.N. Lahiri and Mr Vihang Naik Benchmark Index Nifty 500 TRI Index
Issue Opens October 15, 2018 Issue Closes: October 29, 2018
(Source: Scheme Information Document)

How will the scheme allocate its assets?

Under normal circumstances, the scheme's asset allocation will be as under:

Table 2: LFEF's Asset Allocation

Instruments Indicative allocations
(% of total assets)
Risk Profile
(High/Medium/Low)
Minimum Maximum
Equity and equity related securities including derivatives 100 65 High
Debt and Money Market Instruments 35 0 Low to Medium
Units issued by REITs and InvITs 10 0 Medium to High
(Source: Scheme Information Document)

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The above allocation to market cap segments is based on the current structure of the stock market that could undergo a change in future in accordance with SEBI regulations and guidelines.

For determining these companies, the list of stocks prepared by AMFI in this regard will be used which would adhere to the following SEBI guidelines on classification of market capitalization:

  • If a stock is listed on more than one recognized stock exchange, an average of full market capitalization of the stock on all such stock exchanges will be computed;
  • In case a stock is listed on only one of the recognized stock exchanges, the full market capitalization of that stock on such an exchange will be considered.

Further, the scheme information document states that the scheme will invest in:

  • Equity and equity-related securities including equity warrants and compulsorily convertible instruments.
  • Securities issued or guaranteed by Central Government, State Governments or local governments and/or repos/ reverse repos/ready forward contracts in such government securities as are or may be permitted under the Regulations and RBI from time to time (including but not limited to coupon bearing bonds, zero coupon bonds and treasury bills).
  • Securities issued (including debt issuances) by domestic government agencies and statutory bodies, which may or may not be guaranteed by Central or State Government.
  • Corporate bonds of the public sector or private sector undertakings.
  • Debt issuances of banks (public or private sector) and financial institutions.
  • Convertible debentures.
  • Money Market Instruments (which includes but is not limited to commercial papers, commercial bills, treasury bills, usance bills, government securities having unexpired maturity upto one year, certificates of deposit, bills rediscounting, CBLO, repo, call money and any other like instruments as are or may be permitted under the Regulations and RBI from time to time).
  • Deposits of scheduled commercial banks as permitted under the extant Regulations.
  • Derivatives (which includes but is not limited to stock and index futures or such other derivatives as are or may be permitted under the Regulations and RBI from time to time).
  • ETFs (which includes but is not limited to ETFs that track an index, commodity or basket of assets).
  • Units issued by REITs and InvITS

What will be the Investment Strategy?

As mentioned earlier, LFEF seeks to generate long-term capital appreciation by investing in equity & equity related instruments of up to 30 companies with a flexibility to invest across market capitalization.

LFEF will diversify the portfolio across stocks and sectors and use a bottom-up approach for stock selection with an emphasis on first-hand research. LFEF will favour companies that offer:

  • The best value relative to their respective long-term growth prospects;
  • Returns on capital; and
  • Management quality

While assessing a company, the fund managers will focus on understanding how each of these factors will change over time.

LFEF will have limited exposure to various equity derivatives instruments for the purpose of hedging, portfolio re-balancing and optimizing returns. Hedging does not mean maximization of returns but only attempts to reduce systemic or market risk that may be inherent in the investment.

LFEF may invest in foreign securities which shall be subject to the investment restrictions specified by SEBI/RBI from time to time. The fund manager will consider all relevant risks before making any investment in foreign securities.

Further, the portfolio of the Scheme will be constructed as per the investment restrictions specified under the Regulations that would help in mitigating certain risks relating to investments in the securities market.

Who will manage LFEF?

LFEF will be managed by Mr Soumendra Nath Lahiri and Mr Vihang Naik.

Mr Soumendra Nath Lahiri is the lead manager overlooking the scheme's investment. He holds a B. E (Mechanical) degree and a PGDM from IIM Bangalore.

He has over 28 years of work experience in Equity Analysis. He has worked with Dolat Capital Market Private Limited as Head - Equities for 9 years, then at DSP Merrill Lynch Investment Managers Private Limited as Co-Head - Equities for 4 years, later joined Fortuna Capital as Chief Investment Officer of Advisory Services for 2 years. Then for a brief term, he joined as a Chief Investment Officer-PMS Equity Investment at Emkay Investment Managers Limited followed by a 6-month tenure at Canara Robeco Asset Management Company Limited as Head - Equities. Since 2011, he has been an integral part of L&T Investment Management Limited till date.

At L&T Mutual Fund, Mr Lahiri also manages L&T Dynamic Equity Fund, L&T Equity Fund, L&T Large and Midcap Fund, L&T Midcap Fund, L&T Tax Advantage Fund, L&T Infrastructure Fund, L&T Emerging Businesses Fund and L&T Hybrid Equity Fund.

Mr Vihang Naik is a Bachelor of Management Studies (BMS) and is a CFA holder having over 10 years of work experience in research.

He worked as a Research Analyst for 4 years with SBICAP Securities, thereafter Motilal Oswal Securities for 2 years, and then at MF Global Sify Securities for a little over 2 years before joining L&T Investment Management Limited in 2012 as an Analyst. From 2016 onwards, he has been a Co-Fund Manager at L&T Investment Management Limited till date.

The other schemes managed by Mr Naik at L&T Mutual Fund are L&T Midcap Fund and L&T Long Term Advantage Fund.

Table 3: How have the schemes managed by Mr Lahiri fared?

Scheme Name SI Benchmark Name Managing Since Scheme Returns (%) Benchmark Returns (%)
L&T Infrastructure Fund-Reg(G) NIFTY INFRA - TRI Oct-12 15.55 4.00
L&T Midcap Fund-Reg(G) Nifty Midcap 100 - TRI Jun-13 24.86 17.67
L&T Dynamic Equity Fund-Reg(G) S&P BSE 200 - TRI Dec-12 11.78 12.12
L&T Hybrid Equity Fund-Reg(G) S&P BSE 200 - TRI Dec-12 13.82 12.12
L&T Large and Midcap Fund-Reg(G) S&P BSE 200 - TRI Dec-12 12.78 12.12
L&T Tax Advt Fund-Reg(G) S&P BSE 200 - TRI Dec-12 14.25 12.12
L&T Equity Fund-Reg(G) S&P BSE 500 - TRI Dec-12 12.52 12.05
L&T Emerging Businesses Fund-Reg(G) S&P BSE Small-Cap - TRI May-14 19.16 11.07
(Source: ACE MF-PersonalFN Research)

As it can be seen, most of the schemes managed by the fund manager have been outperforming their respective benchmark index. His management style does give much confidence to investors.

The outlook of L&T Focused Equity Fund:

On evaluating LFEF's investment objective and strategy, it is evident that the fortune of the fund would be closely linked to a maximum of 30 stocks held in the portfolio.

While diversification across market capitalisation segments and stock along with a bottom-up approach to stock selection will help, how the fund manager ultimately constructs the portfolio remains to be seen.

In the present market scenario where small-cap and mid-cap companies are beaten down and so have large-caps toppled; it provides an opportunity to do some value buying to the fund managers. However, amidst the turbulence owing to the macroeconomic headwinds in play, constructing the portfolio would be a challenging task for the fund managers.

If the Indian equity markets hit more turbulence ahead that may inflict extremely-high-risk, even though the fund has the option to invest in equity derivatives instruments for hedging or balancing the portfolio to optimize returns and mitigate the risk involved.

While constructing the portfolio with the aim of diversification, a dominant allocation to large-cap can offer stability to the investment portfolio. Large blue-chip companies with strong balance sheets and proven track records in the portfolio could help ride the wave of short-term volatility to a certain extent. But in the current scenario going gung-ho on small and mid-cap stocks can be more harmful to a focused fund. Ultimately, as mentioned before, how the fund managers construct the portfolio is crucial and remains to be seen.

Editor's note

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Believe it or not, unusual and lesser-known funds can generate big gains for you, the investor.

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Happy Investing!

Author: PersonalFN Content & Research Team

This article first appeared on PersonalFN here.

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

Disclaimer:

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.

Equitymaster requests your view! Post a comment on "L&T Focused Equity Fund: Can Its Focused Approach Pay Off?". Click here!

  

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