Market regulator SEBI has caused a stir with the recent announcement of tweak in the characteristics of multi cap funds. Multi cap funds will now have to invest at least 75% of its total assets in equities, with at least 25% exposure each in large cap, mid cap, and small cap stocks.

Most multi cap funds currently hold a large cap biased portfolio which means that these funds will have to undertake large scale portfolio shift to align with the new norms. However, multi cap funds, especially the large-sized ones, may be reluctant to rebalance. These funds may therefore look at the option of merger or change in mandate of scheme.

It remains to be seen what course of action mutual funds decide. Right now they have kept all the options open keeping in mind the fund objective and investors’ interest. Investors need to keep a close watch on the portfolio movement and changes in fundamental attributes of their multi-cap schemes over the next few months

Kotak Standard Multicap Fund (KSMF) is the largest scheme in the multi cap fund category that has showcased strong performance over the last few years.

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

Graph 1

Data as on September 15, 2020
(Source: ACE MF)

Kotak Standard Multicap Fund (KSMF) is a multi cap fund that has stood strong across market conditions and has done justice to its investors in terms of generating high alpha. In the last three years, KSMF has more than doubled in its size. It currently has a corpus of around Rs 29,714 crore under its management, which nearly raises concern about its capacity. However, the large cap orientation of the fund still offers it some flexibility to accept more investors. By generating a compounded annualised return of around 10.7% over the past 5 years, KSMF has outpaced its benchmark Nifty 200 – TRI index by a CAGR of over 1 percentage point. Notably the index has appreciated at 9.1% CAGR. An investment of Rs 10,000 in the fund, 5 years back, would have grown to Rs 16,599. A simultaneous investment in the benchmark would now be worth Rs 15,481 over the same time period.

Table: Kotak Standard Multicap 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
Parag Parikh Long Term Equity Fund 4,508 24.33 11.98 13.30 14.82 18.25 18.48 0.156
Quant Active Fund 36 31.29 9.88 10.85 13.33 20.53 23.76 0.098
UTI Equity Fund 10,983 17.05 4.40 8.91 10.47 15.25 20.59 0.079
Canara Rob Equity Diver Fund 2,280 16.29 6.89 8.03 10.93 14.32 19.06 0.071
Union Multi Cap Fund 371 13.25 4.43 5.56 8.35 11.56 20.14 0.033
DSP Equity Fund 3,726 8.71 4.75 5.28 10.42 15.95 21.41 0.037
Kotak Standard Multicap Fund 29,714 4.57 2.01 4.15 10.65 17.15 21.12 0.019
LIC MF Multi Cap Fund 295 2.57 0.99 3.84 5.28 9.86 20.20 0.018
SBI Magnum Multicap Fund 9,063 0.76 0.44 2.67 9.73 16.72 20.75 0.000
ICICI Pru Multicap Fund 5,355 -2.10 -4.68 2.02 7.42 13.96 21.81 0.002
Nifty 200 – TRI 5.59 -0.01 4.12 9.12 12.38 21.49 0.053

Returns are point to point and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on September 15, 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.

KSMF stands among the top performers in the multi cap fund category. The fund has shown a stellar performance across time periods and has significantly outperformed its benchmark and many of its category peers in the past. However, in the last one year the fund found itself struggling to keep up with the benchmark and the category average. Nonetheless, over the longer time periods of 5 years and 7 years the fund outperformed the benchmark – Nifty 200 – TRI index by a noticeable margin and has also fared better than its other popular category peers.

KSMF has shown fair level of stability as well. Its standard deviation of 21.12% signifies that the funds volatility has been largely in line with the category average and the benchmark, whereas its risk-adjusted return (Sharpe Ratio) of 0.02 is ahead of many of its peers and in line with the benchmark.

Investment strategy of Kotak Standard Multicap Fund

KSMF was initially launched with a mandate to follow focused investment strategy across few selected sectors. However, post implementation of SEBI classification norms, KSMF was placed under multi-cap funds category, where it is mandated to hold exposure across market caps. The newly defined multi-cap mandate still allows the fund to continue with its strategy of focusing on few chosen sectors, while holding exposure across market caps. Nevertheless in absence of any minimum threshold for exposure to a certain market cap the fund holds a large cap bias where it allocates 70-80% of its assets.

While selecting stocks for KSMF’s portfolio the fund manager follows a combination of top down and bottom up approach to stock picking. The focus is on certain sectors that the fund manager believes will perform better in the economy, and applies bottom up approach to pick stocks within the selected sectors. The funds core portfolio comprises of 5-6 sectors together totalling to around 60% of its assets. Even though KSMF follows a focused approach towards few selected sectors, it tries to ensure that the top 10 stocks does not breach the 50% mark.

Graph 2: Top portfolio holdings in Kotak Standard Multicap Fund

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

KSMF usually holds a well-diversified portfolio of around 50 to 60 stocks. As on August 31, 2020, the fund held as many as 54 stocks in its portfolio, with top 10 stocks together constituting about 48.8% of its assets. While creating the portfolio, the fund manager limits his picks to not more than 5-6 stocks from a single industry. Top large cap names like Reliance Industries, Infosys, ICICI Bank, HDFC Bank, and TCS currently appear among its top portfolio holdings. Ultratech Cement, HUL, L&T, Axis Bank, SRF, etc. have been among the other core holdings in the fund’s portfolio.

In the last one year stocks like Reliance Industries, SRF, Jubilant FoodWorks, Cadila Healthcare, Jindal Steel & Power, Infosys, etc. contributed the most to the fund’s gains though stocks like L&T, Axis Bank, Interglobe Aviation, SBI, RBL Bank, GAIL (India), etc. were the laggards in the portfolio.

Around 27.1% of the fund’s portfolio is allocated to stocks in the Banking and Financial sector, followed by Consumption, Petroleum, and Infotech. These top 5 sectors together account for around 60% of its assets. Cement, Engineering, Oil & Gas, Auto Ancillaries and Pharma are among the other core sectors in the fund’s portfolio.

Suitability

KSMF carries an impressive track record and has turned out to be a rewarding proposition for its long term investors. The extra-ordinary performance of the fund has been driven by its smart sector and stock selection strategy. While the fund remains heavyweight on cyclicals to ride the market boom and rallies, it also makes well use of defensives during extreme market conditions. This helps the fund perform consistently across market phases.

However, its heavyweight position towards few selected sectors may even result in short term underperformance, if any of its core sector holdings disappoint or is under pressure. Besides, the large size of the fund may become a hurdle in switching focus instantly across sectors. This makes it suitable for investors with high risk appetite and a long term investment horizon of at least 5 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


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