Fund pick: Kotak Select Focus Fund

Some minor blips, but ahead in the long-run

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The fund has actively moved across market capitalisation in the three-year time frame. From December 2010 to December 2011, when the CNX 200 Index fell by 27 per cent, the fund increased the allocation to large-cap stocks to 89 per cent

Launched in September 2009, Kotak Select Focus Fund has been ranked CRISIL Fund Rank 2 in the Diversified Equity category under the CRISIL Mutual Fund Ranking for the quarter ended December 2013. The fund has been in the top 30 percentile of the peer group (indicating good performance) since December 2012. Harsha Upadhyaya has been managing this fund since August 2012. The fund’s average assets under management (AUM) for the quarter ended December 2013 stood at Rs 314 crore.

Investment objective
The fund intends to invest in equity and equity-related instruments across companies and market capitalisation. According to the scheme information document, the fund aims to follow a concentrated sector strategy by investing generally in few sectors that have the potential to grow.

Performance
The fund has delivered superior returns and outperformed both its benchmark (CNX 200 Index) and the category over one-, two- and three-year periods ended February 26, 2014 (see chart). The fund has done well on the basis of risk-adjusted performance over the same period, reflected in a higher Sharpe ratio of 0.25, compared with the category’s 0.11.

The fund is also less volatile than the category. The standard deviation or volatility of the fund was 17.91 per cent vis-à-vis the category’s 18.24 per cent and the benchmark’s 20.79 per cent.

In the short term, namely three and six months, the fund has lagged the category but was ahead of the benchmark.

An investment of Rs 10,000 since inception (September 11, 2009) of the fund would have appreciated to Rs 13,983 as on February 26, 2014. An equal amount invested in the benchmark would have returned a much lower Rs 12,377 during the same period.

A monthly systematic investment plan (SIP) of Rs 1,000 over three years ended February 26, 2014 would have grown to Rs 42,441, an annualised return of 11.04 per cent. A similar investment in the benchmark would have grown to Rs 39,893 yielding 6.81 per cent.

Portfolio analysis
The average equity exposure to CRISIL-defined large cap stocks (top 100 stocks based on average market capitalisation on the National Stock Exchange) over the past three-year period ended January 2014 is 77 per cent. The average equity exposure was 95.12 per cent during the same period.

The fund has actively moved across market capitalisation in the three-year time frame. From December 2010 to December 2011, when the CNX 200 Index fell by 27 per cent, the fund increased the allocation to large cap stocks to 89 per cent. Subsequently, when the benchmark went up by 30 per cent in November 2012, the fund reduced large-cap allocation to 64 per cent.

The fund has a concentrated portfolio at the sector level compared with the category over the three-year period ended January 2014. The top five and 10 sectors of the fund formed 57 per cent and 88 per cent of the portfolio, respectively, compared with the category’s 52 per cent and 82 per cent allocation.

The fund has been overweight on software (14 per cent exposure) and consumer non-durables (10 per cent exposure) sectors compared with the category during the same period, and underweight on industrial capital goods, industrial products and oil over the three-year period ended January 2014.

The indices representing these sectors — CNX IT, CNX FMCG, S&P BSE Capital Goods, S&P BSE Oil & Gas — have given annualised returns of 12.61 per cent, 25.15 per cent, -11.14 per cent and -3.75 per cent, respectively, compared with the CNX 200’s 2.41 per cent for the three-year period ended January 2014. Higher exposure to outperforming sectors and lower exposure to underperforming sectors resulted in superior returns.

However, underweight stance on industrial capital goods and industrial products compared with the category has impacted the fund negatively in the recent period. S&P Capital Goods has returned 15.31 per cent versus the CNX 200’s 6.74 per cent in the past six-month period ended January 2013.

The fund has also moved across sectors. During the past one-year period ended January 2014, the fund has increased exposure to the automobiles sector and reduced exposure to consumer non-durables. In the past six months ended January, 2014, CNX Auto and CNX FMCG have given 11.98 per cent and -3.55 per cent, respectively.

CRISIL Research