MFs woo investors with concentrated portfolios

Fund houses look to limit number of stocks; if executed well, experts say, fewer stocks could help generate superior returns

Indian mutual funds seem to have taken to heart Warren Buffett’s mantra of putting all one’s eggs in one basket. A number of them are looking to limit the number of stocks they hold in a portfolio.

Fund houses have filed offer documents for at least four such schemes since the beginning of the financial year.

Global evidence suggests such portfolios tend to outperform if sufficient diligence has been undertaken in stock selection. A study, Portfolio Concentration and Performance of Institutional Investors Worldwide, which looked at returns of 10,771 institutional investors from 72 different countries, bears this out.

“The study shows that, in contrast to the traditional asset pricing theory, concentrated investment strategies in international markets can be under-diversified but optimal. Results suggest that investors rationally choose to be overweight certain markets and industries because of information advantage from specialisation and economies of scale,” said the study authored by Nicole Choi, Mark Fedenia, Hilla Skiba and Tatyana Sokolyk. The authors are from the Universities of Wyoming, Wisconsin-Madison and Brock.

 

The number of stocks in the new funds for which offer documents have been filed ranges from 20 to 35. The schemes are designed so that capital is not spread out, betting that a concentrated portfolio will deliver superior returns.

On June 2, Union KBC filed for the Union KBC Focussed Largecap Fund, which plans to limit its portfolio to 30 stocks.  Pramerica Mutual Fund filed for the Pramerica Focused Equity Fund on June 15. It looks to invest in 25 stocks.

Axis Mutual Fund on July 10 filed a draft offer document for the Axis Focused Bluechip Fund. The investment strategy of the fund is to “run a focused portfolio of 35 stocks, which allows it to give higher allocation to the high-conviction ideas”.

HDFC Mutual Fund's 22 July draft offer document for the HDFC Focused 25 Fund has a similar mandate. "The scheme shall invest predominantly in equity and equity-related securities to form a focused portfolio of up to 25 companies across sectors and market capitalisation. The fund seeks capital appreciation by employing a fundamentals-led, bottom-up investment approach to create a portfolio of fund managers' high-conviction stocks," it said.

“It is essentially about conviction in our investments. A concentrated position can bring in a lot of discipline and help to investigate and monitor the picks better. If executed well, we believe it can deliver significantly better returns than the market,” said Taher Badshah, senior fund manager and co-head of equities at Motilal Oswal AMC, which runs focused schemes.

Others said such funds need to be approached with caution. “If this is being done only to add another theme and garner assets, then it can be dangerous. The strategy may not work if the culture of the asset management house does not gel with a concentrated fund, even if you have a different fund manager,” said a fund manager.

“The theme has been around for a very long time. But I do not see any significant advantage for the investor. For distributors, new fund offers tend to bring in higher commissions and help tap those investors who always ask for something different to put their money in,” said Suresh Sadagopan, founder of Ladder7 Financial Advisories.