The new fund, which will open for subscription on 5th October and close on 19th October, will have a 35-40 stock portfolio with a high active share compared to the benchmark
Aditya Birla Mutual Fund is launching ABSL Special Opportunities Fund, a thematic fund following special situations theme. The new fund will open subscription on 5th October and close on 19th October. To be sure, a special situations fund is not a new thing in India. Sophisticated investors and mutual fund investors have tasted this fund type earlier. What is curious about this ABSL offering is the timing of the launch. Clearly, the fund believes at present there is a list of special stocks/companies. But is that reason enough to buy this story? Let us find out in this article.
Investors who invest in special situations fund need to understand what this exactly is. So, let us get a few basics right.
Special situations investing is not contrarian investing. Contrarian investing is that if others are doing X, you do Y. In special situations investing, you need not do contrarian stuff. Special situations investing is when you buy a stock or sector not necessarily because it is cheap or out of favour, but because there has been a trigger that now makes it attractive.
Special situations investing should also not be confused with value investing. In value investing, you buy something that is cheap compared to its intrinsic value. Globally, contrarian funds, special situation funds, and value funds are three distinct categories.
A special situation fund could, however, be a volatile fund. This is because the fund will have a high active share i.e. a high percentage of stock holdings in the portfolio that differs from the benchmark index. So, such funds do not move in line with the benchmark in the short run.
Bear in mind special situations may not last long, so the window of opportunity, especially entry, can be very short.
It all depends on how you look at post-Covid world. The ABSL Special Opportunities Fund believes we are already in a market that is a Special Situation. Thus, there are a plethora of ‘special opportunities’ that exist today, according to them.
The fund will seek to have a focused portfolio of 35-40 stocks. This thematic fund will have an allocation of 80%-100% to Equity & Equity related instruments of special situations theme. The fund-house says the scheme portfolio will be sector and market cap agnostic i.e. no sector or market cap bias.
The correct answer to this depends on your risk appetite and investment horizon. A special situations fund is likely to have a focussed portfolio compared to a diversified fund. This means a conviction in portfolio holdings will be higher, and this can be a double-edged sword.
A special situations fund being a thematic fund will likely be more volatile than a diversified equity fund. This higher volatility comes with higher return potential.
Also, as mentioned earlier, special situations fund can be to significantly under-weight/over-weight any stock/sector and in that sense is index and market cap agnostic too. The rationale for holding a stock and the holding period will, in most probability, differ in case of a diversified equity fund and a special situations fund.
This depends on how ABSL Special Opportunities Fund defines ‘special situations’. Curiously, the fund says a special situation turns into a ‘special opportunity’ when the management of the target company is capable of navigating through the uncertainty well and the company can adapt, innovate and emerge stronger. So, there is an added emphasis on company management.
Do note that this fund can also invest in international opportunities pertaining to special situations (up to 25% of the corpus) in periods when the opportunity in the Indian market may be limited.
Additionally, the fund has the freedom to invest in IPOs up to 20% of the corpus in Equity & Equity related instruments of companies other than special situations theme.
First of all, special situations may not necessarily generate consistently higher returns.
Secondly, special situation portfolio returns may be lumpy in certain periods. This means there can be a fair share of ups and downs.
Remember that no mutual fund will talk about generating a higher absolute return. This is why funds will sing paeans about ‘high risk-adjusted return’.
Over the years, the Indian investment landscape has seen different special situations funds.
In 2006, Fidelity MF had launched a special situations fund. After Fidelity MF was bought by L&T, this product became L&T India Special Situations Fund. In May-2018, after Sebi categorisation rules, L&T India Special Situations Fund became L&T Large and Midcap Fund.
ABSL MF previously had a special situations scheme. But, Aditya Birla Sun Life Special Situations Fund got merged with Aditya Birla Sun Life Equity Fund in May-2018.
In recent times, special situations thematic product ICICI Prudential India Opportunities Fund was launched in Jan-2019. This fund, which too started out as a high conviction but mcap and sector agnostic, at present, runs a 35-stock portfolio with a largecap bias though 35% is in mid and smallcaps. It’s hugely overweight energy.
On the wealthy investor front, there have been quite a few special situations products like Tata Capital Special Situations Fund, Kotak Special Situations Fund, etc.
It requires a lot of skill and a deep understanding of the market and the business environment for one to identify these special situations/opportunities for investing and patience to see it to play out. Thematic funds in general are more aggressive in nature. Hence, this fund may be more suitable for a more evolved or nuanced investor with higher risk appetite and an investment horizon of five years and beyond.
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