Welcome to  PersonalFN’s weekly analysis on diversified equity mutual funds! In this issue, we have analysed Kotak Emerging Equity Fund, highlighting its performance, peer comparison, investment strategy, fundamentals, portfolio, and suitability.

Kotak Emerging Equity Fund is a well-managed Mid Cap Mutual Fund that has delivered benchmark-beating returns across various market phases and rewarded investors with noteworthy risk-adjusted returns.

Growth of Rs 10,000 if invested in Kotak Emerging Equity Fund 5 years ago

Past performance is not an indicator of future returns
Data as on July 05, 2023
(Source: ACE MF) 

Launched in March 2007, Kotak Emerging Equity Fund is a midcap-biased fund that seeks to identify the hidden growth potential of mid-sized companies. The fund is of the view that since mid-cap companies are relatively under-researched, they can provide opportunities to exploit the gaps between the prevailing market price and intrinsic value. Kotak Emerging Equity Fund was primarily a mid and small-cap fund but was recategorised as a Mid-cap Fund to align with SEBI’s classification norm. The fund now holds a mid-cap biased portfolio, along with significant exposure to small caps and a balanced allocation towards large caps. The fund holds a sizeable portfolio of about 70 stocks spread across sectors by utilising a bottom-up investment strategy. Kotak Emerging Equity Fund stood strong in the 2018-19 mid-cap crash even as many of its peers struggled to keep pace with the market returns, thus turning out to be one of the top performers in the category. It also performed reasonably in the ensuing bull phase by outpacing the category average. With a compounded annualised return of around 18.8% over the past 5 years, Kotak Emerging Equity Fund has significantly outperformed its benchmark Nifty Midcap 150 – TRI index. Notably, the index has appreciated at 17.1% CAGR during this period. An investment of Rs 10,000 in Kotak Emerging Equity Fund 5 years back would have grown to Rs 23,637. A simultaneous investment in the benchmark would now be worth Rs 22,002 over the same period.

Kotak Emerging 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 Mid Cap Fund	1,973	31.07	18.99	40.63	22.87	19.10	18.64	0.47
Motilal Oswal Midcap Fund	4,508	38.31	28.97	40.13	19.33	16.99	17.18	0.52
PGIM India Midcap Opp Fund	8,549	22.16	14.20	38.25	21.49	18.97	17.43	0.50
SBI Magnum Midcap Fund	10,145	29.48	18.58	37.34	19.55	15.31	16.66	0.50
HDFC Mid-Cap Opportunities Fund	39,296	42.24	20.33	36.28	17.73	17.60	16.68	0.48
Nippon India Growth Fund	15,165	34.06	19.10	35.86	19.49	17.83	17.11	0.46
Edelweiss Mid Cap Fund	3,011	30.10	14.73	35.54	18.36	18.01	17.45	0.46
Kotak Emerging Equity Fund	27,871	28.71	14.72	34.17	18.76	17.86	15.79	0.48
Mahindra Manulife Mid Cap Fund	1,208	32.44	14.93	32.67	18.58	—	17.17	0.42
UTI Mid Cap Fund	7,729	27.17	13.48	31.92	16.53	14.82	16.97	0.42
Nifty Midcap 150 – TRI		33.97	15.56	33.97	17.07	17.30	18.00	0.42

The securities quoted are for illustration only and are not recommendatory
Returns are point to point and in %, calculated using the Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on July 05, 2023
(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 before investing. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

Kotak Emerging Equity Fund holds a superior track record of generating market-beating returns over longer time periods. Even though the fund may sometimes trail in the benchmark, it has the potential to perform well in the long run. In the last 1-year and 2-year period, Kotak Emerging Equity Fund’s performance was competitive to the category average, even though it trailed the benchmark Nifty Midcap 150 – TRI. Over the longer 5-year and 7-year time frame, Kotak Emerging Equity Fund stands among the category toppers and ahead of the benchmark.

In terms of risk-reward parameters, the volatility registered by Kotak Emerging Equity Fund is nearly in line with the benchmark index but slightly higher than the category average. Its Sharpe ratio (0.48), signifying risk-adjusted returns, is much higher when compared to the category average as well as the benchmark.

Investment strategy of Kotak Emerging Equity Fund

Classified under the Mid Cap Fund category, Kotak Emerging Equity Fund is mandated to invest a minimum of 65% of its assets in mid-cap stocks. Accordingly, the fund holds a predominant mid-cap biased portfolio. It holds significant exposure across large-cap and small-cap stocks as well. Kotak Emerging Equity Fund makes well use of diversification and invests over 70 stocks spread across sectors in its portfolio. The fund aims to identify the hidden potential of mid-sized companies by utilising the bottom-up stock selection approach. It seeks to invest in companies that are either at their nascent or developing stage and are under-researched but have the potential to deliver higher growth in the long term. The scheme aims to invest across sectors and follows a buy-and-hold strategy to derive the full potential of the stocks. Notably, the fund has had a very low portfolio churning rate of less than 5% in the last one year.

As an AMC, Kotak endeavours to invest in stocks, which, in the opinion of the fund manager, are priced at a material discount to their intrinsic value. The process of discovering the intrinsic value is through in-house research supplemented by research available from other sources. The potential of stocks is guided by considerations such as the financial parameters of the company, reputation of the management and their track record, companies that are less prone to recessions or cycles, companies that pursue a strategy to build strong brands for their products or services, market liquidity of the stock, and so on.

Top portfolio holdings in Kotak Emerging Equity Fund

Holding in (%) as of May 31, 2023
(Source: ACE MF) 

Kotak Emerging Equity Fund usually holds a fairly large portfolio of stocks spread across sectors. As of May 31, 2023, the fund held as many as 78 stocks in its portfolio, with the top 10 stocks comprising around 31% of its assets. Supreme Industries is currently the top holding in its portfolio having an allocation of about 4.2%, followed by Cummins India, Schaeffler India, Persistent Systems, and PI Industries, among others. Most of these stocks have been a part of its portfolio for over two years now.

Names like Schaeffler India, Persistent Systems, Solar Industries India, Cummins India, Bharat Electronics, and SKF India have contributed immensely to the fund’s performance in the last 2 years. It also benefitted hugely from its holdings in Thermax, SRF, Oberoi Realty, Supreme Industries, Ratnamani Metals & Tubes, APL Apollo Tubes, PI Industries, and AU Small Finance Bank, among many others.

In terms of sector, Engineering tops the list of allocation with an exposure of 22.5% followed by Financial Services at about 12.5%. All other sectors have allocation well within the 10% mark. Consumer Durables, Auto Ancillaries, Pharma, Construction, Fertiliser, and Cement are among the other core sectors in the fund’s portfolio. The top 10 sectors together account for around 74.1% of its assets. Though Kotak Emerging Equity Fund’s portfolio is inclined more towards Cyclicals and Sensitive sectors, it is fairly diversified to Defensive sectors as well.

Suitability

Kotak Emerging Equity Fund has a successful track record of generating superior returns across various market phases. It has done exceptionally well in the past few years and has established a robust long-term performance track record. The fund has stood strong during difficult market conditions and has participated well during upside market movements. Notably, its asset size has grown tremendously in the last couple of years driven by its superior performance.

Kotak Emerging Equity Fund carries an impressive track record under the supervision of Mr Pankaj Tibrewal, who is known for his expertise in the mid and small-cap space. The fund’s focus on identifying high-conviction quality stocks in the mid-cap space and holding it with a long-term view has worked in its favour. Moreover, the fund has delivered in terms of risk-adjusted returns.

Kotak Emerging Equity Fund is suitable for investors who can bear the higher volatility associated with the mid-cap space and have a time horizon of at least 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