The trend of domestic mutual funds investing in global securities gained popularity in the year 2020. Many newly launched funds during the year in various themes and categories such as Fund of Fund, ESG, Special Situations, Value, Multicap, and Largecap had a mandate to invest a portion of their assets in international equities. Some existing funds too increased their exposure in offshore securities.

Investing in overseas equities enables funds to benefit from diversification and reduce the impact of volatility on the portfolio. Moreover, it helps the funds to take advantage of a particular opportunity only available in offshore markets.

However, to be considered as an equity fund in India and gain the tax benefit accorded to such funds, these schemes are required to invest at least 65% of its assets in domestic equities.

SBI Focused Equity Fund (SFEF) is a focused fund that invests across market capitalisation and sectors along with some exposure to overseas equities.

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

Data as on December 29, 2020
(Source: ACE MF) 

Launched way back in September 2004, SFEF was earlier known as SBI Emerging Businesses Fund having a mandate to invest in high growth-oriented mid and small cap stocks. However, post implementation of SEBI recategorisation norms in 2018, the scheme was classified as Focused Fund and renamed as SBI Focused Equity Fund (SFEF). While its historical performance prior to CY 2018 is backed by a small and mid cap mandate, the fund has shown outstanding performance in its current focused fund mandate. While its ability to restrict losses stands out when compared to its peers and the benchmark, the fund has done well during market rallies too. By generating a compounded annualised return of around 14.8% over the past 5 years, SFEF has outpaced its benchmark S&P BSE 500 – TRI index by a CAGR of around 2 percentage points. An investment of Rs 10,000 in the fund, 5 years back, would have grown to Rs 19,945. A simultaneous investment in the benchmark would now be worth Rs 18,306 over the same time period.

Table: SBI Focused Equity 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
IIFL Focused Equity Fund	1,210	24.64	27.25	15.15	17.47	NA	23.73	0.141
Axis Focused 25 Fund	13,359	20.56	18.78	12.86	17.56	18.57	21.84	0.122
Motilal Oswal Focused 25 Fund	1,477	17.58	18.66	10.81	13.87	16.88	20.83	0.093
Sundaram Select Focus	1,121	11.87	14.23	10.32	13.20	13.64	20.59	0.089
Principal Focused Multicap Fund	453	18.84	16.05	10.30	13.27	15.34	19.64	0.087
SBI Focused Equity Fund	12,020	15.16	16.42	9.51	14.79	18.76	20.85	0.083
Aditya Birla SL Focused Equity Fund	4,429	15.80	14.29	8.17	12.59	15.49	21.32	0.064
ICICI Pru Focused Equity Fund	894	26.73	13.10	7.94	11.88	13.07	19.59	0.056
DSP Focus Fund	2,042	9.04	14.42	7.55	11.49	15.11	23.58	0.060
Quant Focused Fund	6	24.07	13.97	6.46	11.54	18.97	21.76	0.036
S&P BSE 500 – TRI		17.44	13.40	8.04	12.84	14.27	22.61	0.067

Returns are point to point and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on December 29, 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.

SFEF is a top quartile performer among focused equity funds and has consistently maintained its spot among top category performers. The fund has distinctly outperformed its benchmark – S&P BSE 500 – TRI across periods, except in the last one year. Over the long term horizon of 5-year and 7-year periods, SFEF has managed to generate an alpha of 2 to 4.5 percentage points over the benchmark index and also outpaced many of its peers. On a shorter 2-year to 3-year return period, the fund has managed to outpace the index and the category average by a decent margin.

With a standard deviation of 20.85%, SFEF has shown reasonable volatility compared to the benchmark of 22.61%. The fund has generated superior risk-adjusted returns for its investors. Its Sharpe Ratio of 0.08 is much ahead of the benchmark and the category average, indicating its ability to generate decent premium for the level of risk taken.

Investment strategy of SBI Focused Equity Fund

Being a focused fund, SBI Focused Equity Fund is mandated to take high conviction bets, where the total number of securities in the portfolio would be equal to or under 30. It can invest minimum 65% of its assets in equity and equity related instruments, while it has the flexibility to invest up to 35% of its assets in debt and money market instruments. However, the fund has avoided investing a huge chunk in debt and money market instruments.

The fund also has the flexibility to invest up to 35% of its assets in foreign securities. SFEF follows the bottom-up approach to stock picking and takes high conviction bets in high-growth oriented companies with portfolio spread across market capitalisation and sectors. Aiming to benefit from high-growth oriented opportunities, the fund manager churns a significant portion of the portfolio at times. The turnover ratio of the fund in the last one year ranged 85% to 105%, signifying moderate churning in the portfolio.

As on November 30, 2020, the fund invested about 54% in large caps, 26.5% in midcaps, 3.4% in smallcaps, 9.4% in overseas equities, and 6.8% in cash and equivalents.

Graph 2: Top portfolio holdings in SBI Focused Equity Fund

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

As on November 30, 2020, SFEF held a compact portfolio of 22 stocks diversified across various sectors. The top 10 stocks constitute 58% of its portfolio and include majorly some of the known large cap names like HDFC Bank, Divi’s laboratories, Kotak Mahindra Bank, Bajaj Finance, and P&G Hygiene & Healthcare. In the last one year it has increased its exposure to overseas equity by including stocks like Alphabet Inc and Microsoft in its portfolio. Alphabet Inc now forms part of its top portfolio holding having an allocation of about 6.4%.

In the last one year, stocks like Divi’s Laboratories, Hatsun Agro Products, Tube Investments of India, Bajaj Finance, HDFC Bank, Relaxo Footwears, Fine Organic Industries, Kotak Mahindra Bank, etc. contributed the most to the fund’s gain.

SFEF’s portfolio is currently diversified across host of cyclical and defensive sectors. Around one-fourth of SFEF’s portfolio is allocated to stocks in the Banking and Financial sector, followed by Consumption with an allocation of 11.4%. Pharma, Retail, Telecom, Power, Engineering, and Consumer Durables stood among other prominent sectors, with exposure around 4% or more in each. The top 10 sectors together account for around 80% of its assets.

Suitability

SFEF has proven its ability to identify fundamentally sound high conviction bets across market caps and has gained a spot among category outperformers. Having a portfolio with significant allocation to mid and small caps, SFEF is bound to witness extreme volatility in conditions when the mid and small cap stocks are under pressure or see a sharp correction. Nonetheless, SFEF has put up a decent show even in the recent mid cap crash and managed to limit the downside risk for its. Its fund manager, Mr R Srinivasan has been managing SFEF for over a decade now and has done well to steer the fund through various market phases.

The aggressive investment mandate along with significant allocation to mid and small caps makes SFEF suitable only for investors having a higher risk appetite and a long term investment horizon of 5-7 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