Market boom delivers a huge boost to returns of special situation funds

Boost in special situation funds: The strategy adopted by these funds isn't strictly contrarian; the fund manager will also look for triggers or opportunities that could make certain stocks attractive

The surge in the market this year has propelled the returns for special situation funds that look to capitalise on the opportunities arising out of market dislocations.

ICICI Prudential India Opportunities Fund has given returns of 105 per cent in the past one year against S&P BSE 500 total returns of 61 per cent, shows the data from Value Research.

The other two funds in this category--Aditya Birla Sun Life Special Opportunities Fund and Axis Special Situation Fund have given returns of 34 per cent and 32 per cent, respectively, in the last six months. Both these funds are yet to complete a year of operation.

Special situations can occur due to temporary crises in companies, sectors or the economy, brought on by government action or even global events or uncertainties. Such a theme presents an investment opportunity to an investor who can foresee and interpret the implications of that opportunity. This style of investing is a blend of top-down and bottom-up stock picking style.

S Naren, ED & CIO, ICICI Prudential Mutual Fund says, “Special situation investing generates sizable alpha over the long term. While near-term performance volatility cannot be ruled out, over medium term as high conviction calls start playing out this strategy tends to deliver robust returns. The pandemic brought about several special situation opportunities which we capitalized on which all of which finally led to very encouraging investment outcomes for our investors.”

ICICI Prudential India Opportunities Fund looks to invest in fundamentally strong companies which are facing temporary setbacks.

Special situation funds delivers strong returns

Fund Name	6 months returns	1 year returns	Net Assets (Cr)
Aditya Birla Sun Life Special Opportunities Fund	33.99	N.A	733
Axis Special Situations Fund	31.6	N.A	2566
ICICI Prudential India Opportunities Fund	42.57	104.81	4299

Source: Value Research
 

Many investors think of special situations as a form of value or contrarian investing. However, unlike the contra strategy, a special situations fund manager doesn’t look to buy stocks just because they are cheap or out of favour but looks for some triggers that could make them attractive.

Currently, most of the funds are invested largely into the large cap companies. In the last one year Sensex has gained by 50 per cent.

Kaustubh Belapurkar, director – manager research, Morningstar India says, “Special situations typically involve investing in stocks whose prices are beaten down as the company or the sector/industry are going through a temporary downturn but fundamentally remain strong. Over the past year the undervalued segment of the market has made a comeback and done well.  Investors need patience in such funds, as there could be a fair bit of volatility in the short term before the cycle turns in favor of such stocks. Use these as satellite exposure in investment portfolios.