In the last 6 months, the equity markets witnessed a trend reversal of sort. Mid cap stocks which were facing severe pressure over the past two years have not only managed to catch up with the large caps but have also outpaced them. The trend could continue moving ahead as the economy recovers and corporate earning improves.

But considering the uncertain and volatile nature of equity markets it would be prudent to invest in a fair mix of large and mid cap stocks through actively managed large & mid cap funds.

Kotak Equity Opportunities Fund (KEOF) is one such large & mid cap fund that looks for opportunities in large and mid cap stocks across sectors with an aim to generate capital appreciation.

KEOF was launched in September 2004 and currently has an asset size of Rs 3,188 Crore. Mr Harsha Upadhyaya is the fund manager of the scheme (since August 2012) who has over two decades of experience spread across equity research and fund management.

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

Data as on February 26, 2020
(Source: ACE MF)

KEOF’s superior performance over its benchmark is clearly visible in the last 5 years. During the period, KEOF generated returns at a compounded annualised growth rate of nearly 11% as compared to 7.6% generated by its benchmark Nifty 200 – TRI. If you had invested Rs 10,000 in KEOF five years back on February 26, 2015, it would have grown to Rs 16,833 now (as calculated on February 26, 2020). A simultaneous investment of Rs 10,000 in its benchmark would now be worth Rs 14,408. The fund has proven its ability to timely identify and capture available opportunities and create significant wealth for long term investors.

Graph 2: Kotak Equity Opportunities Fund’s year-on-year performance

*YTD as on February 26, 2020
(Source: ACE MF)

Launched in September 2004, KEOF has a long term performance track record to its credit. The year-on-year performance comparison of KEOF relative to its benchmark Nifty 200 – TRI shows that the fund outperformed the benchmark in 6 out of last 10 calendar years with a noticeable margin of around 3 to 12 percentage points. Though the fund generated returns nearly in line with the benchmark in CY 2017, it struggled to catch up with the index in CY 2018. However, it managed to significantly improve its performance in the ensuing year. In the current year too the fund has been able to maintain superior lead over the benchmark till now.

Table: Kotak Equity Opportunities Fund’s performance vis-a-vis category peers

Scheme Name	Corpus (Cr.)	1 Year (%)	2 Year (%)	3 Year (%)	5 Year (%)	Std Dev	Sharpe
Mirae Asset Emerging Bluechip	9,806	11.42	7.87	16.95	20.03	13.75	0.16
Invesco India Growth Opp Fund	2,447	7.31	9.37	15.18	14.09	12.17	0.19
Sundaram Large and Mid Cap Fund	1,110	7.77	8.78	14.92	13.82	13.25	0.15
Canara Rob Emerg Equities Fund	5,625	4.17	4.53	14.48	17.51	14.62	0.14
LIC MF Large & Midcap Fund-	639	6.84	6.23	14.42	12.08	13.19	0.14
Kotak Equity Opp Fund	3,188	9.06	5.81	12.94	13.66	12.34	0.13
Essel Large & Midcap Fund	107	8.54	5.05	12.71	NA	13.28	0.08
Principal Emerging Bluechip Fund	2,202	1.24	2.51	12.60	15.66	14.64	0.09
Edelweiss Large & Mid Cap Fund	512	6.37	7.48	12.37	11.55	12.00	0.16
DSP Equity Opportunities Fund	5,663	6.91	4.51	12.18	13.49	13.11	0.09
IDFC Core Equity Fund	2,780	2.05	3.35	11.65	11.67	13.01	0.07
Tata Large & Mid Cap Fund	1,631	11.10	7.07	11.62	12.45	11.81	0.11
SBI Large & Midcap Fund	2,978	5.79	5.48	11.23	12.43	12.50	0.11
ICICI Pru Large & Mid Cap Fund	3,277	4.15	2.94	9.91	9.38	12.03	0.01
L&T Large and Midcap Fund	1,350	-0.06	0.80	9.90	10.23	13.71	0.05
Aditya Birla SL Equity Advantage Fund	5,039	2.20	0.47	9.34	12.48	14.53	0.05
HDFC Growth Opp Fund	1,384	4.20	3.21	8.80	6.49	13.25	0.03
BOI AXA Large & Mid Cap Equity Fund	186	-0.60	0.65	8.20	7.78	15.70	0.05
Quant Large & Mid Cap Fund	4	1.03	-0.07	8.02	14.52	12.33	-0.03
Franklin India Equity Advantage Fund	2,623	1.25	2.58	7.97	9.85	12.24	0.01
NIFTY 200 – TRI		6.48	7.16	12.56	10.31	12.06	0.10

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 February 26, 2020
(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.

KEOF outpaced the benchmark and category average across rolling time period, except for 2-year rolling period where it trailed the benchmark. The recent outperformance has helped it figure among the top quartile performers and has even scaled up its performance across time periods.

The fund stood among the category toppers on a 1-year rolling return basis and also veered ahead of many of peers on 2-year, 3-year and 5-year rolling return basis. Some of the other top performers in the category include Mirae Asset Emerging Bluechip Fund, Invesco India Growth Opportunities Fund, Sundaram Large and Mid Cap Fund, and Canara Robeco Emerging Equities Fund.

In terms of risk-reward parameters, KEOF’s volatility has been lower than the category average though slightly higher than the benchmark. Its risk-adjusted returns as denoted by Sharpe are higher than the benchmark and many category peers.

Investment strategy of Kotak Equity Opportunities Fund

Categorised as large & midcap fund, KEOF invests predominantly in a mix of large cap and mid cap stocks with an aim to derive superior performance compared to other diversified equity schemes. The fund invests across sectors based on performance and potential of companies within the sectors. It adopts a bottom up approach to portfolio construction.

Allocation between large and mid caps are driven by the overall macro-economic conditions, choice of sectors, business environment & valuations. The fund has the flexibility to invest up to 30% of its assets in other equity instruments as well as debt and money market instruments.

Graph 3: Portfolio allocation and market capitalisation trend in Kotak Equity Opportunities Fund

Holding (in %) as on January 31, 2020
(Source: ACE MF)

KEOF is mandated to invest minimum 35% of its assets each in large caps and mid caps. The fund holds a diversified portfolio fairly balanced across market caps. In the last one year, the fund’s allocation towards large caps ranged between 45-50%, while that of mid caps ranged between 35-40%. Its allocation towards small caps has slightly increased from around 7% a year ago to around 9% now. The fund held rest of its assets in the form of cash which forms up to 6% of its portfolio. As on January 31, 2020, KEOF held 44.9% in large caps, 39.2% in mid caps, 9.3% in small caps and the balance 6.6% in cash and equivalents.

Graph 4: Top portfolio holdings in Kotak Equity Opportunities Fund

Holding (in %) as on January 31, 2020
(Source: ACE MF)

KEOF usually holds a well-diversified portfolio of around 50 to 55 stocks. As on January 31, 2020, the fund held as many as 54 stocks in its portfolio across various sectors and market caps. The top 10 stocks constitute 40.7% of its portfolio with no individual stocks having concentrated allocation. ICICI Bank has the highest stock allocation of 5.9%, followed by other large cap names like HDFC Bank, Reliance Industries, L&T and Infosys forming another 19% of its portfolio.

Sector wise, the fund has the highest exposure to Banking at 17.6% with another 8.1% in Finance. Engineering, Oil & Gas and Cement are the other top sector holding. The other prominent sectors include Infotech, Petroleum Products, Consumption, Auto ancillaries, Fertilisers, and so on.

Top contributors

In the last one year, KEOF benefitted immensely from its holdings in ICICI Bank, Indraprastha Gas, SRF, Gujarat Petronet, Bata India, AU Small Finance Bank, HDFC Bank, Coromandel International. These stocks together contributed weighted return of around 12% to the portfolio.

However, stocks like Indian Bank, GAIL (India), Healthcare Global Enterprises, Cummins India, Schaeffler India, Edelweiss Financial Services, etc. eroded some of its gains.

Suitability of Kotak Equity Opportunities Fund

KEOF’s carries an impressive track record across market cycles. The fund has rewarded its long term investors with superior returns at reasonable level of risk. Its diversified portfolio of stocks and sectors across market caps, mainly large and mid caps, enabled it to boost its performance. Though the high concentration towards financial sectors has benefitted it so far, it can lead to short term underperformance if the sector moves out of favour. The presence of mid and small caps in the portfolio makes it suitable for aggressive investors 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