Focused Funds are equity mutual funds that take concentrated bets in high-conviction and high-quality names. Such funds focus on investing in a limited number of stocks (maximum 30), where the fund manager has high conviction.
The success of a Focused Fund depends on the stock-picking skills and abilities of the fund manager. Hence, it is important to stick to experienced fund managers who have proven their ability to take timely calls and have been capable of generating significant alpha for investors.
IIFL Focused Equity Fund is a Focused Fund that has registered superior performance and generated market-beating returns for its investors across various time periods, thus compensating well 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 October 31, 2022
(Source: ACE MF)
IIFL Focused Equity Fund aims to generate long-term capital appreciation by investing in a concentrated portfolio of maximum of 30 high-conviction stock ideas. The fund follows a multi-cap approach to invest across market cap segments but with a large-cap bias. The fund aims to identify strong growth companies offering favourable risk-reward ratios and restricts allocation towards value traps and short-term fads. After recording a good start during its initial years, the fund’s performance deteriorated between 2017 and 2018 causing a noticeable underperformance compared to the benchmark and category peers. Nonetheless, it made a strong comeback post-2018 and now stands among the top quartile performers in the Focused Fund category. IIFL Focused Equity Fund’s robust performance in the past few years has attracted investors’ attention, helping it triple the AUM in the last 2 years. Over the last 5 years, IIFL Focused Equity Fund has registered a growth of around 17.1% CAGR as against 12.6% 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 22,011, while a simultaneous investment in its benchmark would now be worth Rs 18,072.
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 |
| Quant Focused Fund | 143 | 12.26 | 35.91 | 22.62 | 14.71 | 15.50 | 23.33 | 0.23 |
| ICICI Pru Focused Equity Fund | 3,620 | 5.54 | 32.93 | 22.46 | 13.95 | 14.46 | 20.63 | 0.24 |
| IIFL Focused Equity Fund | 3,231 | 1.81 | 29.22 | 22.05 | 17.08 | 17.72 | 23.25 | 0.23 |
| Nippon India Focused Equity Fund | 6,039 | 6.30 | 37.47 | 21.97 | 12.39 | 14.66 | 26.30 | 0.22 |
| Franklin India Focused Equity Fund | 8,072 | 7.86 | 39.12 | 20.97 | 13.51 | 14.78 | 25.56 | 0.21 |
| HDFC Focused 30 Fund | 2,329 | 16.99 | 43.22 | 20.52 | 11.47 | 13.36 | 24.48 | 0.21 |
| Sundaram Focused Fund | 736 | 1.99 | 29.40 | 19.65 | 13.92 | 14.43 | 21.10 | 0.21 |
| SBI Focused Equity Fund | 27,607 | -3.52 | 27.63 | 17.50 | 15.06 | 15.27 | 21.11 | 0.19 |
| Aditya Birla SL Focused Equity Fund | 5,712 | 0.73 | 24.95 | 16.08 | 11.11 | 12.90 | 22.09 | 0.17 |
| IDFC Focused Equity Fund | 1,313 | -0.74 | 17.62 | 14.20 | 8.51 | 12.53 | 22.34 | 0.16 |
| S&P BSE 500 – TRI | 3.91 | 28.67 | 18.38 | 12.56 | 14.07 | 23.21 | 0.19 |
Returns are point to point and in %, calculated using Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on October 31, 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 been a top-quartile performer over longer time frames. The fund maintained a clear lead over its benchmark S&P BSE 500 – TRI as well as most of its category peers and generated noticeable alpha between 2019 and 2021. With this, IIFL Focused Equity Fund has managed to build a strong long-term performance track record. Over the longer 3-year, 5-year, and 7-year periods, it has outpaced the benchmark by around 3-4 percentage points. Even though the fund’s performance has slipped in the last one year, it has the potential to bounce back strongly.
Its outperformance in the last few years has helped the fund outscore in terms of risk-adjusted returns and stand strong vis-a-vis its category peers. IIFL Focused Equity Fund has recorded volatility in line with the benchmark and the category average but 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 the mandate to allocate a minimum of 65% of its assets in equities investing in a maximum of 30 stocks. Accordingly, IIFL Focused Equity 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 the 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 utilises 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 has been in the range of 20% to 40%, signifying low churning in the portfolio.
Graph 2: Top portfolio holdings in IIFL Focused Equity Fund
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Holding in (%) as of September 30, 2022
(Source: ACE MF)
Being a Focused Fund, IIFL Focused Equity Fund holds a concentrated portfolio of 25-30 high-conviction stock ideas. As of September 30, 2022, IIFL Focused Equity Fund held 30 stocks in its portfolio. Top large-cap names like ICICI Bank, HDFC Bank, Infosys, Bharti Airtel, and L&T currently figure among the top holdings in the fund’s portfolio. Crompton Greaves Consumer Electricals is the only stock from the lower market cap in its top holdings. The top 10 stocks together account for 48.8% of its assets. Some of these stocks have been a part of the fund’s portfolio for over 2 years now.
In the last one year, IIFL Focused Equity Fund has benefitted the most from its holdings in ICICI Bank, Apollo Tricoat Tubes, CCL Products (India), SBI, and Bharti Airtel. However, the fund’s holding in Infosys, L&T Infotech, BPCL, Cyient, and Divi’s Laboratories, among others, eroded some of its gains.
IIFL Focused Equity Fund’s portfolio is skewed towards stocks in the Banking and Financial sector that collectively form nearly one-third of its assets. It also held major allocation to Infotech, Engineering, and Auto & Auto Ancillaries that form another 35% of its holdings. Some other core sectors in its holdings are Telecom, Consumer Durables, and Pharma, among others. IIFL Focused Equity Fund’s portfolio is fairly diversified across cyclical, defensive and sensitive sectors.
Suitability
IIFL Focused Equity Fund has built a commendable performance track record in a shorter time span and rewarded investors across the market phases it has witnessed so far. The fund has achieved this without exposing the portfolio to unnecessary risk. Notably, its Sharpe ratio is currently among the best in the focused fund category, thus rewarding its investors with superior risk-adjusted returns.
IIFL Focused Equity Fund is benchmark agnostic. The fund manager follows the business cycle investment approach to determine sector allocation according to the probability of whether they will outperform or underperform. He takes focused exposure in sectors that are likely to do well in the medium to long term. This strategy can help IIFL Focused Equity Fund to deal with market volatility going ahead and generate decent alpha for its investors.
IIFL Focused Equity Fund is suitable for investors looking to earn decent alpha through a concentrated portfolio of high-conviction stocks with a long-term horizon of at least 5 years.
This article first appeared on PersonalFN here
