By Siddharth Singh, Founder, Starlight Wealth Advisors LLP
Picture an all-you-can-eat buffet at a swanky restaurant, providing an assortment of dishes. But, for the consumer, his/her meal invariably tends to comprise just a handful of dishes. So, it turns out that a consumer need not have a vast array of food, if they know which ones tastes good. In investing too, for better returns, it is not necessary to have a portfolio with a high number of stocks. Focus has the potential to bring in rich rewards if you know which companies to concentrate on. This is where focused equity funds come in. This type of equity fund over the years has gained popularity among the investors. Positioned between sectoral/thematic funds and diversified funds, focused equity schemes can be considered as the meeting point between diversification and concentration, without lowering the guard on risk.
In a typical cricket match (considered a team game); winning or losing a match is largely on account of a few individual players’ contribution. A couple of centuries have the capacity to tilt the balance of the game. Similarly, in the mutual fund arena, the average diversified fund has multiple potential winners but portfolio space is limited to say 2-3% for each stock. It’s like giving the best batsman just a few balls to make runs, or the best bowler under an over to make a lasting impact. As a result, investors receive sub-optimal returns due to over diversification.
Time-tested investment studies and research have confirmed that a few big winners are better, than having a large number of just average or below average securities in a portfolio. Focused equity funds bring to life the highest conviction ideas in a de-risked portfolio. This approach does not cut diversification, yet helps give the most promising stocks the portfolio allocation they truly deserve. With the added benefit of low-correlation with market, focused equity funds also has the potential to stand tall in rough weather. Between January 17 and March 23, 2020, when Indian markets corrected nearly 40%, three out of every four focused equity funds shielded wealth better than the Sensex.
Focused equity schemes are a 22 member strong club in the MF landscape with close to Rs. 50,000 crore investor assets, which grew by about 20% year on year while a 24% rise in investor folios have pushed the folio count to 3.7 million, as of July 2020.
Investing for tomorrow
Being ahead of time is one of the essential traits to make big money when it comes to long term investing. Fat a time when there is a sizeable amount of uncertainty owing to the developments related to the Coronavirus pandemic, focused equity funds which are likely to make outsized returns over the coming years is likely to have the following four key themes in their portfolio.
Micro shift – Mutual fund portfolios which comprise of financially strong companies with better earnings visibility are likely to come out on the top in the current health crisis.
Rural tilt – Mutual fund schemes with bigger exposure towards rural economy oriented companies are better positioned to deliver given the amid sustained demand scenario.
Double Ds – Disruption and Dislocation are perennial investing themes. Beneficiaries will be equity funds, with higher exposure to firms that are expected to benefit from disruption due to COVID-19, or those who can deal with the dislocation of the supply chains.
Chasing value – A contra-cyclical and value oriented approach merits attention today since valuations has once again come to the fore. Schemes with names which offer higher margin of safety coupled with good earnings visibility is likely to out-perform over the medium to long term.