Markets May Disappoint You, But Opportunity Funds May Not - Outside View by PersonalFN

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Markets May Disappoint You, But Opportunity Funds May Not
Nov 2, 2015

In stock markets, thriving investment opportunities are widely pursued but rarely found readily available. Stock picking is an art and a science. This is why the track record of investments of one investor, significantly varies from another. When markets rally magnificently, even an ordinary mutual fund may do well. But the men are separated from the boys when markets move sideways; or amid the turbulence tend to descend. This puts mutual funds to acid test.

At present Indian equity market is struggling to sustain the up-move. Midcaps have run ahead of the largecaps and overall valuation seems stretched. In such a scenario stock picking for fund managers is a challenge. But those who have identified promising opportunities have exhibited an edge over the others.

An investment mandate to follow a respective market capitalisation segment, usually limits the potential of capital appreciation. Funds following a flexi cap approach are poised slightly better. But opportunities funds with the mandate to invest across market capitalisation segments, sectors and themes; tend to do better with greater flexibility imbibed in the investment mandate. Their portfolios are often well-diversified enabling them to do well on a risk-adjusted return basis.

However, you can't just invest in any opportunities oriented fund blindly. They may hold a concentrated portfolio and hence you need to be watchful.

How have opportunities funds fared?

Scheme Name 6 Mths (%) 1-Yr (%) 2-Yr (%) 3-Yr (%) 5-Yr (%) Std Dev Sharpe Ratio
Birla SL Special Situations Fund (G) 8.3 19.9 37.7 23.8 9.8 19.76 0.23
Mirae Asset India Opportunities Fund (G) 5.6 12.8 31.5 23.3 13.5 15.70 0.27
Franklin India Opportunities Fund (G) 3.5 14.2 32.8 22.4 10.6 17.13 0.23
Tata Equity Opportunities Fund (G) 6.0 16.3 27.7 21.7 11.2 14.82 0.26
Reliance Equity Opportunities Fund (G) 4.7 11.0 35.3 21.4 14.2 17.01 0.23
DSPBR Opportunities Fund-Reg(G) 6.4 13.1 26.9 21.3 9.5 15.99 0.24
L&T India Spl.Situations Fund (G) 4.1 11.7 28.5 20.6 11.9 16.10 0.23
Kotak Opportunities Fund (G) 6.3 14.4 27.3 20.6 9.9 15.74 0.23
HSBC India Opportunities Fund(G) 0.1 7.4 28.6 20.1 10.9 17.05 0.20
DWS Investment Opportunities Fund (G) 3.4 10.2 21.1 17.3 6.1 15.36 0.18
HDFC Core & Satellite Fund (G) 7.9 7.9 31.7 16.6 6.4 21.15 0.13
UTI Opportunities Fund (G) 0.2 3.7 19.7 15.4 10.8 15.22 0.15
S&P BSE 200 1.5 6.2 19.3 14.8 6.3 15.90 0.13

Data as on October 28, 2015
Note: Returns are on a rolling basis and those depicted over 1-Yr are compounded annualised. Risk is measured
by Standard Deviation and Risk-Adjusted Return is measured by Sharpe Ratio
They are calculated over 3-Yr period assuming a risk-free rate of 7.38% p.a.)
(Source: ACE MF, PersonalFN Research)

Only a handful of funds in the opportunities category have managed to do well across timeframes. Funds with lower risk exposure (as denoted by Standard Deviation) and high risk-adjusted returns (as denoted by Sharpe Ratio) are preferable, but weightage should also be given to other parameters such as investment processes and systems followed by the fund house, overall track record of the fund house, quality of risk management and so on. As you may know, past performance doesn't guarantee good returns in future.

Opportunity funds are not alike...

The portfolios disclosed on September 30, 2015, reveals that fund managers of opportunities funds have not exhibited skew to any specific market capitalisation. Exposure of opportunities funds to mid and small cap segment has ranged from 5%- 50%. While most of the funds remained invested, weightage to cash and equivalent assets ranged 1.0% to 12.0%; suggesting lack of unanimity on market valuations as well. As remains the question of sectorial allocation, a few funds have been bullish on sectors linked to the progress of economy while others have not. Stock specific exposures and single stock exposure have varied to a great extent.

What to expect going forward?

Domestic factors remain a mixed bag. There are upside risks to food inflation, but inflation expectations of the central bank on a broader level remain sombre. At present, RBI monetary policy stance has been supportive to growth. Speaking about prospects of economic growth, a lot depends on how quickly capex cycle turns and consumption demand revives. While a few sectors continue to rumble under mounting pressure, others are showing signs of revival.

Going by recent trends, it is likely that monetary policies of other major central banks across the globe are to stay accommodative.

To put it simple, we are in a situation where markets look fully priced for near term positives such as, low crude oil prices, stable rupee and chances of implementation of Goods and Services Tax code (GST) from April 2016, to name a few. As a result, Indian equity markets are expected to remain range bound unless two of the following factors turn extremely positive...

  • Government successfully introduces reforms having far-reaching effects; and
  • Corporate earnings grow substantially

Which opportunities funds you should invest in?

PersonalFN is of the view that, it is difficult to guess which opportunities funds will do well going forward. But ones that have disciplined investment approach and consistent track record are the most dependable when markets are overvalued.

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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