Focused Funds endeavour to identify high conviction stocks in select sectors that are expected to do well in the medium to long term and take concentrated exposure in such stocks/sectors. These funds have the flexibility to choose high potential stocks from across market caps and sectors, giving them the opportunity to benefit from dynamic market conditions.

However, on the off chance that the fund manager’s bets do not pay off as expected, investors may incur heavy losses due to high concentration of the portfolio. Therefore, it is important to select Focused Fund for your portfolio carefully.

IIFL Focused Equity Fund is a Focused Fund that has generated market-beating returns for its investors across various time periods, thus well-compensating investors for the level of risk taken.

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

Past performance is not an indicator of future returns
Data as on April 13, 2022
(Source: ACE MF)  

Launched in October 2014, IIFL Focused Equity Fund follows a multi-cap approach to invest across market cap segments but with a large-cap bias. It aims to identify strong growth companies offering favourable risk-reward ratios and restricts allocation towards value traps and short-term fads. During the market crash of 2020, IIFL Focused Equity Fund outpaced the benchmark S&P BSE 500 – TRI by a noticeable margin of around 5 percentage points. In the current bull phase the fund has outpaced the category average by around 4 percentage points. IIFL Focused Equity Fund’s robust performance in the past couple of years has attracted investors’ attention. Its AUM has grown by around four times in the last 2 years. Over the last 5 years, IIFL Focused Equity Fund has registered a growth of around 18.9% CAGR as against 15% CAGR delivered by its benchmark S&P BSE 500 – TRI. An investment of Rs 10,000 in the fund 5 years back would now be valued at Rs 23,737, while a simultaneous investment in its benchmark would now be worth Rs 20,143.

Table: IIFL Focused Equity Fund’s performance vis-á-vis category peers

Scheme Name	Corpus (Cr.)	1 Year	2 Year	3 Year	5 Year	7 Year	Std Dev	Sharpe
IIFL Focused Equity Fund	2,824	27.99	44.74	24.46	18.86	15.98	22.29	0.27
Quant Focused Fund	77	26.72	48.42	23.40	16.55	14.64	22.21	0.23
Sundaram Focused Fund	694	26.08	41.17	20.76	16.45	13.30	19.88	0.24
SBI Focused Equity Fund	24,905	27.03	38.18	19.37	17.88	14.97	20.43	0.22
Nippon India Focused Equity Fund	5,814	27.70	53.31	19.22	14.43	13.31	26.28	0.18
ICICI Pru Focused Equity Fund	3,091	27.45	43.00	18.34	14.59	11.99	20.05	0.21
Axis Focused 25 Fund	19,560	17.94	35.75	17.83	16.15	14.45	21.63	0.19
Franklin India Focused Equity Fund	7,719	28.70	45.27	17.81	14.39	12.56	25.48	0.17
Baroda BNP Paribas Focused Fund	218	24.71	36.18	17.65	—	—	19.99	0.19
HDFC Focused 30 Fund	1,210	40.33	48.56	16.49	11.62	11.36	24.83	0.15
S&P BSE 500 – TRI		25.59	45.30	17.68	15.03	12.49	22.47	0.18

Returns are point to point and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on April 13, 2022
(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.

IIFL Focused Equity Fund has constantly maintained a clear lead over its benchmark S&P BSE 500 – TRI as well as most of its category peers across various time frames. With this, the fund has managed to build a strong performance track record. Over the last 3-year period, the fund has outperformed the benchmark and the category average by around 7 percentage points. Even on the longer 5-year and 7-year horizon, it has outpaced the benchmark by around 3.5-4 percentage points.

Its outperformance over the last few years has helped the fund improve significantly in terms of risk-adjusted returns as well and stand strong vis-a-vis its category peers. IIFL Focused Equity Fund has recorded volatility in line with the benchmark whereas it clearly stands out in terms of risk-adjusted returns as denoted by the Sharpe ratio.

Investment strategy of IIFL Focused Equity Fund

Classified under the Focused Funds category, IIFL Focused Equity Fund has a mandate to allocate a minimum of 65% of its assets in equities investing in a maximum of 30 stocks. Accordingly, the fund holds a compact portfolio of around 30 high conviction stocks. The scheme endeavours to identify the sectors that are likely to do well in the medium term based on the business cycle of the economy and take focused exposure to securities of companies in identified sectors. The sectors are actively monitored and changes are made to invest in sectors that will benefit from the current stage of the business cycle.

IIFL Focused Equity Fund utilises a SCDV (Secular, Cyclical, Defensives, and Value Trap) investment framework to identify high conviction stocks and determine its weightage in the portfolio:

S- Secular – Companies with consistent ROE & PAT growth > 15%

C- Cyclical – Companies with PAT growth > 15% but ROE < 15%

D- Defensive – Companies with ROE > 15% but PAT growth < 15%

V- Value Traps – Companies with both ROE & PAT growth < 15%

IIFL Focused Equity Fund uses the bottom-up approach to pick stocks across market cap segments but maintains a large-cap bias. The turnover ratio of the fund in the last one year ranged from 30% to 50%, signifying moderate churning in the portfolio.

Graph 2: Top portfolio holdings in IIFL Focused Equity Fund

Holding in (%) as of March 31, 2022
(Source: ACE MF)  

Being a Focused Fund, IIFL Focused Equity Fund invests in a concentrated portfolio of 25-30 high conviction stock ideas. As of March 31, 2022, the fund held 30 stocks in its portfolio. Top large-cap names like ICICI Bank, HDFC Bank, Infosys, L&T, and Axis Bank currently figure among the other top holdings in the fund’s portfolio. The top 10 stocks together account for 52.6% of its assets. Some of these stocks have been part of the fund’s portfolio for over 2 years now.

IIFL Focused Equity Fund benefitted immensely from names like SRF, Infosys, ICICI Bank, Bharti Airtel, L&T Infotech, Bajaj Finance, and Cyient, that contributed over 15% to its absolute gains in the last one year. L&T, Apollo Tricoat Tubes, SBI, Divi’s Laboratories, Axis Bank, etc. were among the other major contributors to its performance.

IIFL Focused Equity Fund’s portfolio is skewed towards stocks in the Banking and Financial sector that forms 33.7% of its assets. It also held major allocation to Infotech, Engineering, Auto & Auto Ancillaries, Telecom, Pharma, and Consumption that form another 51% of its holdings. Some other core sectors in its holdings are Consumer Durables and Petroleum Products. The fund’s portfolio is fairly diversified across cyclical, defensive, and sensitive sectors.

Suitability

Over the last few years, IIFL Focused Equity Fund has outperformed many of its prominent peers in the category. The fund has achieved this without exposing the portfolio to unnecessary risk. Notably, its Sharpe Ratio is currently the best in the focused category. With this, the fund has rewarded its investors with superior risk-adjusted returns.

IIFL Focused Equity Fund’s portfolio is fairly-diversified across a range of stocks which it holds with a long-term view. However, at the sector level, the fund’s allocation to certain sectors such as Financials and Infotech is on the higher side. The fund may witness higher volatility in case one or more of these sectors temporarily move out of favour.

IIFL Focused Equity Fund is suitable for investors looking to earn decent alpha from a concentrated portfolio of high conviction stocks with a long-term horizon of at least 5 years.

This article first appeared on PersonalFN here