June quarter corporate earnings announced so far has been better than expected, beating street estimates. This brought a sense of optimism among investors who were expecting it to be a ‘washout quarter’ amid the demand shock and slowdown in business operations due to the pandemic.

However, local lockdown in many cities since July may act as a hurdle to recovery. It remains to be seen if corporates can maintain growth sustainably while near term uncertainties continue to be at play. Despite this, investors can benefit from this volatility by focusing on disciplined investing and asset allocation with a long-term view.

Kotak Equity Opportunities Fund (KEOF) is one such mutual fund in the large & midcap category that looks to explore possible investment opportunities across various sectors amidst volatility in the equity market and undertakes smart underweight/overweight position in them.

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

Data as on July 22, 2020
(Source: ACE MF) 

KEOF has generated market-beating returns across various bull and bear market phases. The fund has proven its ability to timely identify and capture available opportunities and create significant wealth for its long term investors. By generating a compounded annualised return of around 8.5% over the past 5 years, KEOF has outpaced its benchmark Nifty 200 – TRI index by a CAGR of over 2 percentage points. Notably, the index has appreciated at 6.2% CAGR during the period. An investment of Rs 10,000 in the fund, five years back, would have grown to Rs 15,017. A simultaneous investment in the benchmark would now be worth Rs 13,515 over the same time period.

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

Scheme Name	Corpus (Cr.)	1 Year (%)	2 Year (%)	3 Year (%)	5 Year (%)	7 Year (%)	Std Dev	Sharpe
Mirae Asset Emerging Bluechip	9,834	6.67	8.40	6.33	12.87	24.33	22.26	0.038
Invesco India Growth Opp Fund	2,498	2.41	0.94	5.12	7.90	14.94	20.32	0.025
Edelweiss Large & Mid Cap Fund	464	2.53	0.71	4.83	6.61	13.05	19.91	0.013
Tata Large & Mid Cap Fund	1,494	1.36	5.42	4.36	6.99	13.90	20.65	0.006
Kotak Equity Opp Fund	3,298	5.16	4.43	4.18	8.46	15.05	21.08	0.010
Canara Rob Emerg Equities Fund	5,162	6.70	2.31	3.83	9.83	22.74	21.52	0.001
Sundaram Large and Mid Cap Fund	1,113	-1.75	-0.11	3.35	7.13	14.17	22.41	0.003
Quant Large & Mid Cap Fund	5	11.91	4.73	3.17	8.73	18.35	19.77	-0.019
DSP Equity Opportunities Fund	4,733	3.23	2.47	3.02	8.02	14.54	22.00	-0.001
LIC MF Large & Midcap Fund	662	1.80	0.99	3.02	8.25	NA	20.31	-0.010
Nifty 200 – TRI		-1.10	0.42	3.43	6.20	11.06	21.40	0.001

Returns are point to point and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on July 22, 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.

In the last one year, KEOF has managed to generate an alpha of around 6 percentage points over the benchmark Nifty 200 – TRI. The recent outperformance has helped it figure among the top quartile performers and has even scaled up its performance across time periods. On a longer 5-year and 7-year return period, the fund has managed to outpace the index by over 2-4 percentage points and has also fared better than many of its prominent category peers.

KEOF has shown fair level of stability as well. Its standard deviation of 21.08% is lower than the category average though in line with the benchmark, whereas its risk-adjusted return (Sharpe Ratio) is among the highest in the category and better than the benchmark.

Investment strategy of Kotak Equity Opportunities Fund

Classified under Large & Mid Cap Funds, KEOF is mandated to invest at least 35% of its assets in large caps with a simultaneous investment of at least 35% in mid-caps. KEOF follows an opportunistic investment style where it looks for growth opportunities across sectors by investing in high potential companies in the large and mid-cap segment.

While selecting stocks for KEOF’s portfolio the fund manager follows a combination of top-down and bottom-up approach to stock picking. The focus is on finding opportunities in certain sectors that the fund manager believes will perform better in the economy, and applies the bottom-up approach to pick high potential stocks within those sectors.

The fund’s core portfolio comprises of 5-6 sectors together totalling to around 50-60% of its assets. It follows buy and hold strategy for most of its core holdings with many stocks being in the portfolio for well over 2 to 3 years.

Graph 2: Top portfolio holdings in Kotak Equity Opportunities Fund

Holding in (%) as on June 30, 2020
(Source: ACE MF)

KEOF usually holds a well-diversified portfolio of around 50 to 55 stocks. As on June 30, 2020, the fund held as many as 56 stocks in its portfolio, with top 10 stocks together constituting around 36% of its assets. Top large cap names like Reliance Industries, HUL, ICICI Bank, Infosys and Britannia Industries currently appear among its top portfolio holdings. Coromandel International, SRF Ltd., Gujarat State Petronet, Dr Reddy’s Lab, and Indraprastha Gas were the other top holdings in the fund’s portfolio.

In the last one year, its core holdings in Reliance Industries, Coromandel International, Dr Reddy’s Lab, Indraprastha Gas has contributed the most to its gains. On the other hand, stocks like Axis Bank, L&T, ICICI Bank, HDFC Bank eroded some of its gains.

Suitability

KEOF’s performance in the recent extreme conditions has been commendable; it has done reasonably during market rallies as well driven by its smart sector and stock selection strategy. The fund manager has successfully kept volatility at a reasonable level and delivered in terms of risk-adjusted returns. The fund has, however, marginally trailed the category average on multiple occasions in the past. With significant exposure to mid caps along with some allocation towards small caps in the fund’s portfolio, high volatility cannot be ruled out. This makes KEOF suitable for investors with a high risk appetite and an investment horizon of at least five years.

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