While most mutual funds typically hold anywhere between 50 -100 stocks in their portfolio for optimal diversification, the performance over a certain period is mainly driven by a select few stocks. On the contrary some funds have bucked this trend to focus on a limited number of high conviction stocks and hold them for long-term to maximise their returns.

SBI Focused Equity Fund is one such fund with a focused mandate of investing in maximum 30 stocks across market cap segment to appreciate wealth in the long-term. It aims to provide investors with opportunities of long-term capital appreciation by investing in a concentrated portfolio of equity and equity related instruments.

Launched in October 2004, the fund has a corpus of Rs 5,726 crore which makes it one of the largest funds in the category. Notably, SBI Focused Equity Fund was earlier known as SBI Emerging Businesses Fund with a mandate of investing in stocks of Mid and Small sized companies.

The fund is managed by Mr R. Srinivasan (since May 2009) who has over 26 years of experience in Indian equities.

Graph 1:  Growth of Rs 10,000 if invested in SBI Focused Equity Fund 5 years ago

Data as on October 09, 2019
(Source: ACE MF)

Had you invested Rs 10,000 in SBI Focused Equity Fund five years back on October 09, 2014, it would have grown to Rs 18,228 by now (as calculated on October 09, 2019). This translates into compounded annualised growth rate of 12.76%. In comparison, a simultaneous investment of Rs 10,000 in its benchmark S&P BSE 500 – TRI would now be worth Rs 15,229 (a CAGR of 8.78%). As can be seen in the chart alongside, the fund has generated significant lead over its benchmark in the last five years.

Graph 2:  SBI Focused Equity Fund year-on-year performance

*YTD as on October 09, 2019
(Source: ACE MF)

The year-on-year performance comparison of SBI Focused Equity Fund vis-à-vis its benchmark S&P BSE 500 – TRI shows that the fund outperformed the benchmark in 7 out of last 10 calendar years. Barring CY 2013, CY 2016 and CY 2018 the fund managed substantial lead over the benchmark across calendar years. In the current year, the fund has shown significant improvement in performance and has outpaced the benchmark by a noticeable margin

Table 1: SBI Focused Equity Fund performance vis-à-vis category peers

Returns are on a rolling basis and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on October 09, 2019
(Source: ACE MF)

*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

SBI Focused Equity Fund outpaced the benchmark and average category returns with significant margin across rolling periods.

In fact, it stands among the top performers across rolling periods. Axis Focused 25 Fund, Sundaram Select Focus, JM Core 11 Fund, Nippon India Focused Equity Fund and Franklin India Focused Equity Fund are the other top performers in the category.

In terms of risk-return parameters, SBI Focused Equity Fund registered lower volatility as compared to most of its peers but slightly higher as compared to the benchmark. However, it has rewarded investors with decent risk-adjusted returns.

Investment strategy of SBI Focused Equity Fund

Being a focused fund, SBI Focused Equity Fund is mandated to limit the number of stocks in the portfolio to maximum 30. It can invest minimum 65% of its assets in equity and equity related instruments, while it has flexibility to invest up to 35% of its assets in debt and money market instruments. However, the fund has avoided investing in debt and money market instruments.

The fund manager follows bottom-up stock picking approach to take high conviction bets in companies across market capitalisation and sectors. The fund’s portfolio is now biased towards large caps along with significant allocation in mid and small caps.

Graph 3: SBI Focused Equity Fund portfolio allocation and market capitalisation trend

Holding (in %) as on September 30, 2019
(Source: ACE MF)

SBI Focused Equity Fund invests across market capitalisation with a large cap bias. The fund generally allocates around 50% of its holdings in large cap stocks while its allocation towards mid caps is in the range of 15-20%. The fund has gradually reduced its allocation in the highly volatile small caps from around 30% a year ago to around 15-20% at present. During this period the fund simultaneously increased its allocation towards more stable large caps. Balance of the fund’s holdings is maintained in the form of cash equivalents.

Graph 4:  SBI Focused Equity Fund top portfolio holdings

Holding (in %) as on September 30, 2019
(Source: ACE MF)

Categorized under focused fund, SBI Focused Equity Fund had a concentrated portfolio of 26 stocks as on September 30, 2019. The top 10 stocks constitute 55% of the total holdings and are diversified across various sectors. HDFC Bank tops the list with an allocation of 9%, followed by Procter & Gamble Hygiene & Healthcare at 7.6% and Axis Bank at 7.1%. Rest of the stocks in the top 10 holdings have allocation in the range of 4-5% each.

In terms of sector, the fund has its highest exposure to Banking at 25.2%, with another 8.5% in Finance. Consumption (16.6%) has the next highest allocation in the portfolio, followed by Engineering and Power with allocation of 7% and 6.2%, respectively. Consumer Durables, Pharmaceuticals and Telecom services are the other prominent sectors in the portfolio.

Top Contributors

Among the stocks in the portfolio, Kotak Mahindra Bank contributed the most to the fund’s return in the last one year with a weighted return of 2.1%. Procter & Gamble Hygiene & Health Care, Fine Organic Industries, HDFC Bank and Elgi Equipments were the other top contributors to the portfolio gains.

On the other hand stocks like Sheela Foam, Indostar Capital Finance and Hatsun Agro Products eroded some of its gains in the last one year.

Suitability of SBI Focused Equity Fund

SBI Focused Equity Fund allocates majority of its portfolio in selected stocks diversified across market capitalisation and sectors. Its compact portfolio style allows the fund manager to take high conviction bets on stocks having potential to generate higher returns. However, the concentrated portfolio may lead to high volatility, if any of the selected stocks come under pressure. Such funds are suitable only for aggressive investors having tolerance to volatility and high risk appetite, along with an investment horizon of 5 years or more.

Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

This article first appeared on PersonalFN here.