This year has been an eventful year in terms of adversity. There have been many instances that have caused a major change in the way that businesses have been run. Since March, many companies have had to reorganise resources and increase their adaptability quotient to survive the impact of COVID-19 pandemic.

Aditya Birla Sun Life Mutual Fund is of the view that. ‘Special situations are unique challenges that a business, sector or an economy may face. It leads to temporary dislocation in price. These Special Situations may be opportunities for those who dare to see it.’

Diagram: Where do opportunities lie?

(Source: Product note)

Hence the fund house launched Aditya Birla Sun Life Special Opportunities Fund to capture these opportunities that are available in the current uncertain period since WWII, as pointed by the fund house in its product note. There is a heightened possibility of consolidation and emergence of new trends across sectors. Many companies have witnessed downgrading on demand and growth concerns – significant rerating opportunity and there is abundance of liquidity is favourable for equities.

Besides that, the companies facing special situation are usually available at lower valuations. Hence it wants to provide investors an opportunity to grow wealth over a long term by launching this thematic scheme.

From a risk standpoint, given the portfolio allocation is skewed heavily to equity, Aditya Birla Sun Life Special Opportunities Fund is an extreme high-risk contender, and thus suitable only for investors who have a high-to-very-high-risk appetite and an investment horizon of more than 5 years.

Table 1: Details of Aditya Birla Sun Life Special Opportunities Fund

Type An open-ended equity scheme following special situations theme Category Thematic fund
Investment Objective To provide long term capital appreciation by investing in opportunities presented by special situations such as corporate restructuring, Government policy change and/or regulatory changes, companies going through temporary but unique challenges and other similar instances.

The Scheme does not guarantee/indicate any returns. There can be no assurance that the schemes' objectives will be achieved.
Min. Investment Rs 5,000 and in multiples of Re 1 thereafter Face Value Rs 10 per unit
  • Regular
  • Direct*
  • Growth*
  • Dividend
  • Pay-out
  • Reinvestment*
*Default option
Entry Load Nil Exit Load
  1. For redemption / switch-out of units within 90 days from the date of allotment: 0.50% of applicable NAV.
  2. For redemption / switch-out of units after 90 days from the date of allotment: Nil
Fund Manager
  • Mr Anil Shah
  • Mr Chanchal Khandelwal
  • Mr Vinod Bhat
Benchmark Index S&P BSE 500 TR Index
Issue Opens: Monday, October 5, 2020 Issue Closes: Monday, October 19, 2020

(Source: Scheme Information Document)

How will the scheme allocate its assets?

Under normal circumstances, it is anticipated that the asset allocation of the scheme will be as follows:

Table 2: Aditya Birla Sun Life Special Opportunities Fund ‘s Asset Allocation

Instruments Risk Profile Normal Allocation (% of total Assets)
Equity & Equity related instruments of special situations theme High 80% – 100%
Other Equity & Equity related instruments High 0% – 20%
Debt, Units of Mutual Fund schemes, Money Market Instruments and Cash & Cash Equivalents Low to Medium 0% – 20%
Units issued by REITs & InvITs Medium to High 0% – 10%

(Source: Scheme Information Document)

What is the Investment Strategy?

Special Situations are exceptional market scenarios when the market offers businesses at prices which do not reflect the true potential or true value or there is a significant deviation from its own long term trajectory. During such events, typically, the prospects of such impacted businesses are at an inflection point, such that market participants view these companies as departing from their traditional growth path, either up or down. As such, different portfolio managers could benefit from the same opportunity in different ways (like going long or short on the same stock), but are primarily focused on benefiting from the special situation.

The Scheme will follow a bottom-up approach for stock selection. The Scheme will invest in stocks with an emphasis on situations considered out-of-the-ordinary and which, therefore, present interesting stock picking opportunities. The list of special situations is mentioned below; it is only an indicative list and not exhaustive.

  1. Company Specific (Event/Developments) :

    These include factors like change in management, mergers & acquisitions, corporate restructuring, holding companies trading at discount, regulatory changes, product line changes/disruptions, sale of business line or assets unfavourable macro/business cycle, unforeseen circumstances like strikes, fires, business related events, controversy, etc.

  2. Industry Specific (Event/Developments):

    Special situations might arise due to regulatory changes, government reforms, including disinvestment or privatization, change in macro-economic scenarios, change in tariffs/taxes, high leverage, change in market conditions. Most of these developments are likely to have an impact that is not easily measurable

  3. Macro-economic/Global changes:

    Here are some instances of Special situations which may arise owing to global or domestic macroeconomic changes. There may be unusually large swings in prices of raw material/final products in certain industries, any global/domestic event impacting Crude oil prices, any domestic event or macro environment impacting inflation, foreign exchange rates, Current account & Fiscal Deficits, Socio or financial crisis caused by Global political events, etc.

  4. Corporates Actions:

    Special situations could also be Arbitrage opportunities arising out of buy-backs, mergers, disinvestment of business, large asset sales, special dividends, de-mergers, delisting, bonus & stock split, IPOs, QIPs, Parent sell down or creeping takeover by Parent, etc.

  5. Technological Disruption:

    Companies in various sectors and industries are continually engaged in the process of technological innovation, in addition of new product lines that are developed on the basis of some new technology to suit the customer requirement. This would usually result in either one company leading the technological disruption while a few others get disrupted.

Both can be considered as opportunities for a Special Situations themed fund. Such special situations and consequent investment opportunities are almost always available as there are a mix of company specific development/opportunities, changes or development in the macro environment or business cycle, any significant development at the sector or political scenario going on always.

The frequency of such opportunities may increase or decrease, but they continue to be available at all points in time. It is important to note that special situation is a global theme. Such opportunities are available to all market participants including other equity funds such as diversified funds, thematic funds, etc.

However, it is important to note that while the opportunity is available to both diversified equity fund and special situation focused fund, the rationale and the way this opportunity will pan out is likely to differ.

Same stock may be viewed and considered for fundamental reasons as maybe a value buy or a stock where a special situation exists. Hence, two different portfolio managers may pick the same stock with different expectations and maybe different holding periods too.

Some of the key differentiators (including but not limited to) are as follows:

Holding Period: The investment strategy and the special situation may be perceived by different portfolio managers for different time periods. Diversified equity funds usually invest in companies with a secular growth potential in a medium to long-term holding period so these funds may continue holding a stock even after the special situation has panned out.

On the other hand, Special Opportunities Fund may consider benefitting from the same special situation only till the time the event plays out.

  • Theme Allocation in the Portfolio:

    A diversified equity fund may only allocate a smaller proportion of its overall portfolio to special situation as compared to a Special Situations Fund which has its whole portfolio dedicated to such opportunities theme.

  • Portfolio Concentration:

    Given the investment universe available for Special Situations, a thematic fund, focused on Special Situations theme, is likely to have a higher portfolio concentration compared to a more diversified theme.

  • Risk – Reward Positioning:

    As mentioned above, compared to a more diversified mandate, a thematic fund based on Special Situations theme is likely to be more aggressive and hence in a higher risk-reward position. This fund may be more suitable for a more evolved or nuanced investment with a higher risk appetite as compared to a diversified equity fund which is suitable to a relatively conservative or a first-time equity investor also.

There may also be such periods where owing to a variety of reasons, there is a shortfall of special situations. In this scenario, a fund may resort to some of the following points amongst many things.

Since this fund has the enablement to invest in foreign securities (upto 25% of the corpus), in periods where the opportunity in the India market may be limited, the portfolio manager may widen the scope of investing to international opportunities pertaining to special situations.

Given that the impact of a certain special situation can be longer lasting and hence, the holding period of such companies which are expected to be beneficiaries of these special situations may also be extended.

The Scheme may also invest in ADR/GDR and equities of listed overseas companies. These investments will be made in line with the RBI and SEBI guidelines and will be within the limits prescribed by SEBI/RBI from time to time. The Scheme may also invest a small portion of its corpus in money market instruments to manage its liquidity requirements.

All companies selected will be analysed taking into account the business fundamentals like nature and stability of business, prospects of future growth and scalability, financial discipline and returns, valuations in relation to broad market and expected growth in earnings, the company’s financial strength and track record.

The portfolio shall be structured so as to keep risk at acceptable levels and invest across market cap. This shall be done through various measures including:

  1. Ongoing review of relevant market, industry, sector, and economic parameters.
  2. Investing in companies which have been researched. Companies deemed to be leaders in their respective products/industry.
  3. High quality businesses exhibiting favourable economics, capable and trustworthy management teams.
  4. Other parameters like operating profit margin, net profit margin, P/E ratio, better earnings visibility, etc.
  5. Investments in debentures and bonds will usually be in instruments which have been assigned investment grade ratings by any approved rating agency.

Who will manage the Aditya Birla Sun Life Special Opportunities Fund?

Mr Anil Shah and Mr Chanchal Khandelwal would be the designated Fund Managers of the Scheme, but the overseas investments of the scheme will be managed by Mr Vinod Bhat.

Mr Anil Shah is a Commerce Graduate, C.A, and a Cost Accountant with over 29 years of experience in equity research and investments. Prior to joining ABSLAMC, he has worked with RBS Equities (India) Ltd. (formerly known as ABN AMRO Asia Equities (India) Ltd.) for around 15 years.

At present Mr Anil manages Aditya Birla Sun Life Equity FundAditya Birla Sun Life Manufacturing Equity Fund, and Aditya Birla Sun Life Midcap Fund.

Mr Chanchal Khandelwall completed his Commerce Graduation with Honors from Shri Ram College of Commerce located at Delhi followed by MBA with specialisation in Finance from Xavier Institute of Management, Bhubaneshwar.

Mr Chanchal has an overall experience of around 15 years of which 10 years is in financial markets with ABSLAMC. Prior to joining ABSLAMC, he has worked with Aditya Birla Retail Limited (February 2007 – May 2008) and Aditya Birla Management Corporation Ltd. (December 2005 – February 2007) in the areas of Strategy and Corporate Finance.

At present Mr Chanchal manages Aditya Birla Sun Life India GenNext Fund, Aditya Birla Sun Life Resurgent India Fund – Series 3, Aditya Birla Sun Life Resurgent India Fund – Series 4 and Aditya Birla Sun Life Resurgent India Fund – Series 5.

As mentioned earlier, Mr Vinod Bhat will manage the overseas investments of the Scheme.

Mr Bhat has an overall experience of 18 years with over 12 years in the financial markets and investment banking space. He has been associated with ABSLAMC since July 2018 as Head of Investor Communications (Investments – Equity). He CFA (USA), MBA Finance – Wharton University of Pennsylvania (USA), M.S. Industrial Engineering – Pennsylvania State University (USA), B.Tech & Mechanical Engineering – IIT Bombay.

At present Mr Vinod manages Aditya Birla Sun Life Global Emerging Opportunities Fund, Aditya Birla Sun Life Global Real Estate FundAditya Birla Sun Life Asset Allocator Multi Manager FoF Scheme and Aditya Birla Sun Life Financial Planning FoF.

The outlook for Aditya Birla Sun Life Special Opportunities Fund

In order to achieve the objective of the scheme, the fund managers will actively manage the scheme. As per the product note, the fund managers will follow a bottom-up approach to stock-picking to construct a focused portfolio of 35-40 stock from across sector and market cap agnostic. To screen stocks, the managers will use a “Price-Target approach” to derive value from tactical opportunities arising due to any special situation.

Hence the fortune of the Aditya Birla Sun Life Special Opportunities Fund will be hinged on the stocks held in the portfolio. Due to the Coronavirus disruption, there are ample opportunities to do stock picking as per the theme of the fund. But the construction of the portfolio would be a challenge for the fund managers and their team to spot opportunities in the current environment given the risk management measures they adopt.

Aditya Birla Sun Life Special Opportunities Fund is a sectoral fund within the equity universe, making it the riskiest investment proposition as it is placed at the higher end of the risk-return spectrum, particularly when bets in case of most others are at odds. So, consider the implications involved before investing in it.

Hence invest in a sectoral fund only if you:

  • Have an extremely high-risk appetite
  • Can stay invested for 7-10 years without getting perturbed

This article first appeared on PersonalFN here

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