NFO review: L&T Focused Equity Fund to bet on concentrated equity strategyThere are many equity funds in the market that promise you ‘focus’. It is well-known that in the bull cycles of the market it is a handful of stocks that actually do well. But, knowing what will perform and what wont is the million-dollar question. With concentrated bets, most focused mutual funds aim to hit the bull’s eye by investing in the right stocks. It is a higher risk and higher reward proposition.

In this context, L&T Mutual Fund, billed among the top 15 fund-houses in India, is launching a new fund offer (NFO): L&T Focused Equity Fund. The new offer will first open for subscription on October 15 till October 29, thereafter one can invest at the available NAV.

Let us find out whether this fund deserves your attention or not.

Focus pays

If you look back at how Indian stock markets have moved in the past few bull phases, there have been a few winners in every phase. In the Y2K boom, it was tech stocks. In the boom period starting 2004, infrastructure sold like hot cakes. Even in 2018, before markets have started correcting, 6-7 stocks drove up the large-cap index Sensex. This means if you get your bets right, there are big gains to be had. The keyword is: IF. With most fund-houses tracking 350-400 stocks as their investible universe, using stringent financial filters will almost always narrow the game down to 30-40 stocks.

The L&T Focused Equity Fund aims to invest in a maximum 30 stocks to build its concentrated portfolio. In essence, it will overlook 10-20 good potential stocks so that it can bet on 30 great potential stocks. The portfolio construction will be as follows: about 50-70% in large cap, 20-30% in mid cap and 0-20% in small cap.

High conviction

Focused funds are high-conviction plays. Portfolio managers running PMS products use this high conviction strategy a lot. Increasingly, many mutual fund investors also question whether it is actually good for a fund to hold 50-60 stocks. Not just L&T MF, Motilal Oswal MF for a long time has argued that diversification beyond your control becomes unmanageable and adds no value to your portfolio. Apparently, in most portfolios the top five good quality stocks contribute 80% of overall performance while the rest 20% is contributed by bad quality stocks. But, it is the skill of a fund manager to have those good quality stocks at the right time. For instance, TCS in the last one year has given great returns, but 12 months before it the stock wasn’t doing that well. So, owning the right stock at the right time matters.

Fund strategy

Like any other focused fund, this L&T offering wants to have a high-conviction and concentrated portfolio to build a stringent process with a clear focus on risk management. This makes the fund extremely methodical and strives to choose the best possible investments, which can work in the investor’s favour to potentially deliver higher alpha over the long term.

Such strategies work best in a multi-cap approach. L&T Focused Equity Fund happens to have a multi-cap portfolio strategy. This means it will be market cap agnostic with no bias for sector calls.

The fund aims to use bottom-up stock selection using the fund-house’s proprietary G.E.M investment approach. For those who don’t know what bottom-up stock selection means, it is a way where the fund manager focuses attention on a specific company, rather than on the industry in which that company operates, or on the economy as a whole.

Peers 

As mentioned earlier, there are different equity schemes with ‘focus’ or ‘focused’ in their name. There is the Sundaram Select Focus Fund. Kotak Standard Multicap was earlier known as Kotak Select Focus. There is the DSP Focus Fund. There are also the Axis Focused 25, Franklin India Focused Equity, Reliance Focused and Aditya Birla Sun Life Focused Equity, among others. But do not assume that their historical returns will be similar or there will be a trend. Focus funds are all about selecting the right stock at the right time.

Fund managers

S N Lahiri and Vihang Naik. Lahiri is a star fund manager of the fund-house.

Exit load

There will a load of 1% if investments are redeemed within 1 year from the date of allotment.

NFO period

The NFO opens October 15, 2018  and closes October 29, 2018.

Minimum application amount

Lump sum: Rs 5,000 per application and in multiples of Re. 1 thereafter
SIP: Rs 500 (minimum 6 monthly instalments or minimum 4 quarterly instalments)

RupeeIQ take – From the looks of it, the fund will try to straddle all ends of the market cap spectrum but will be large cap-focused. So, at least half of the fund assets would be in large caps, and the rest in mid and small caps as per the fund manager’s call. This is a fund for aggressive investors who believe the fund managers’ stock selection capabilities and are ready to be long-term. With markets volatile, there may be great investment opportunities around us, but then a poor choice of stocks can also make you bleed. So, it is about your conviction on the fund manager’s stock-picking ability.

Disclaimer: Please note that investors are requested to consult their financial, tax and other advisors before taking any investment decision.