What are focused equity funds? How do they fare against multicap funds?

Fund selection remains key because there are schemes with 10-year CAGR of 10-14% while some focused equity MFs have even failed to beat SBI bank fixed deposit rate

Kumar Shankar Roy Jun 30, 2020

Focused Equity FundsA few big winners would be better than a large number of average or below average winners. That is the spirit behind focused equity funds which believe in focussed investing rather sprinkling money around several companies. While remaining diversified in their approach, such focused funds basically invest in the respective fund-house’ best conviction ideas. Where the focus helps is the amount of concentration.

Imagine a portfolio 10 years ago with Page Industries, Bajaj Finance, and Eicher Motors. But at 1-2% exposure, even multi-baggers will not make much of a difference to returns. This is where focus pays off. In this article, we will look at different facets of focused equity funds and tell you which investors should buy them. Read on.

Defining focus

Typically, focused equity funds select between 25-30 stocks to construct a portfolio. Usually, these funds are keen to keep their flexibility by opting for a multicap nature. This means there is no bias towards large, mid, or small-cap.

Do note a focused fund is riskier than a typical diversified fund. Due to this higher risk, returns can be higher as well as more volatile.

Different focused equity funds have a number for the number of stocks in their portfolio at any given time. The largest fund, Axis Focused 25 looks at up to 25 best ideas with high conviction. The third-largest and fourth-largest schemes in this space, Franklin India Focused Equity Fund, and Nippon India Focused Equity Fund invests in a maximum of 30 stocks.

You can argue that already there are multicap funds. Then, how are focused equity funds with multicap strategy different? The answer lies in the number of holdings. For example, Union Multicap Fund is also multicap in nature but the scheme has over 60 stocks in its portfolio while Union Focused Fund has a 30-stock cap.

The lower number of stocks in the focused equity fund will mean the active weights to each stock will be higher. Having said that, a focused fund will not be as risky as a smallcap fund, which typically deals in small companies. Higher the weight to individual winning stocks, the more pronounced will their return effect on fund returns. Take a look at the graphic below to understand how stock weights and portfolio returns are related.

Focused funds

Investing philosophy

Focused equity funds will likely have different, even contrasting, philosophies. Funds typically look at attributes like a sustainable business, an active high conviction of investing strategy, pure bottom-up or top-down or blended, and risk management. For instance, Axis Focused 25 is more bottom-up while Nippon India Focused Equity Fund is a combination of top-down and bottom-up.

Try to look at how funds manage risk. The portfolio may be well-diversified but check for diversification of stocks & themes. Some funds focus on niche ideas, good quality companies, and an optimal mix of ‘Growth’ & ‘Value’ play. Others can be growth-focused, like Mirae Asset Focused Fund that aims to build a portfolio of strong growth companies. Franklin India Focused Equity Fund and ICICI Prudential Focused Equity Fund appear to adhere to ‘value’ fund style. SBI Focused Equity Fund and HDFC Focused 30 Fund follows a more ‘blended’ style.

Joining the ranks of focused funds is HSBC Focused Equity Fund with its new fund offer. The NFO period is 1-15 July 2020.

In the backdrop of Covid-19 disruption, focused investing into businesses that are structurally strong and those that have low leverage and strong balance sheets can pay off well. These businesses are likely to bounce back faster in the current uncertain environment.

We surveyed all the focused equity funds. A few current trends are mentioned below in terms of portfolio positioning:

* Bullish on large private sector banks, insurance companies, Gas utility companies, cement, telecom, chemicals, and industrials also find favour.
* Funds are selectively preferring companies linked to consumption due to overall valuations. Stocks related to staple firms are preferred over large ticket discretionary consumption.
* Some funds are under-weight IT, but others prefer large IT services companies.
* Also, focused equity funds appear under-weight on NBFCs, PSU Banks, metal companies.

Returns check

In 2018-19, fund categories were reorganised. Some funds were put in the focused equity category. Others were born because two different funds were merged and now operated as focused equity mandate. Being multicap funds, we think it is best to compare focused equity funds with multicap funds.

From an average return point of view, focused equity funds appear to have done well compared to multicap equity funds in 3 year, 5 year and 10 year timeframe (point to point returns as on June 26, 2020).

Drilling deeper, about 40-50% of focused equity funds, however, fail to beat the average multicap equity category return. This means that fund selection becomes very crucial. Focus doesn’t mean funds can’t go wrong; in fact the cost of errors will be higher in focused equity funds.

In the 10 year return chart, SBI Focused Equity Fund, Franklin India Focused Equity Fund and Nippon India Focused Equity Fund are top 3.

In the 3 year and 5 year return charts, SBI Focused Equity Fund, IIFL Focused Equity Fund and Axis Focused 25 Fund are the top 3.

Take a look at the fund returns below along with category averages.

Fund Name AUM (Rs Cr) 3 Yr Rtn (%) 5 Yr Rtn (%) 10 Yr Rtn (%)
Axis Focused 25 9,428 5.57 8.41
SBI Focused Equity 8,012 6.87 9.26 14.29
Franklin India Focused Equity 6,769 0.06 4.02 11.78
Nippon India Focused Equity 3,226 -2.19 4.67 10.50
DSP Focus Fund 1,607 1.12 3.96 7.62
IDFC Focused Equity Fund 1,188 0.11 4.21 6.29
IIFL Focused Equity Fund 776.00 6.16 8.52
ICICI Pru Focused Equity 613.00 2.31 4.60 8.32
HDFC Focused 30 Fund 404.00 -4.92 1.94 5.61
Principal Focused Multicap 322.00 3.85 6.25 8.70
Focused equity category n.a. 1.89 5.58 9.14
Multicap equity category n.a. 1.09 4.87 8.94

RupeeIQ take

Given the nature of focused equity funds, investors who have the ability to withstand higher volatility and have patience should go with this category. Allocation via the SIP route is preferable than the lump sum route. Best to invest in funds with a proven track record. If you come across a new fund that is doing well, give it some time to see how it does over 3-5 year time.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.

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