Picture an all-you-can-eat buffet at a swanky restaurant. There is an assortment of dishes available. But, for the consumer, meal always comprises just a handful dishes. If they know which ones taste good then they don’t need a vast array of food. In investing too, portfolios that obtain the highest returns for investors are not usually those with scores and scores of stocks. Investments concentrated in a few companies or industries have a far better shot at building vast wealth. Focus brings rich rewards if you concentrate on where the maximum profit potential lies. This is why focused equity funds have gained popularity over time. Positioned nicely between sectoral/thematic funds and diversified funds, focused equity schemes are the holy child of diversification and concentration, without lowering the guard on risk. In short, they are a pocket-sized dynamo where the best ideas marry conviction.
In a typical cricket match which is marketed as a team game, winning or losing is on account of a few individual players' contribution. A fiver or a century heavily tilts the balance of the game.
In the mutual fund arena, the average diversified fund has multiple potential winners but portfolio space is limited to 1-2 per cent 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. Even that kind of a portfolio has its average or below average performing stocks. Result? Investors get sub-optimal returns because the fund chose security in numbers, not substance.
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 stand tall in rough weather or not. When Indian markets during January 17 to March 23 fell nearly 40 per cent, three out of every four focused equity funds shielded wealth better than the Sensex.
The smart money knows. As a result, focused equity schemes are a 22-strong club in the MF landscape with close to Re 50,000 crore investor assets, which grew by about 20 per cent year on year while a 24 per cent rise in investor folios have pushed the number to 3.7 million.
Investing for tomorrow
Success in investing comes from being ahead of time. Investing today is investing for tomorrow. Focused equity funds that are positioned to take advantage of four key themes that will play out, are poised to deliver outsized returns.
Micro shift - Mutual fund portfolios, which shift focus to the micro themes by focusing on financially strong and better earnings visibility endowed companies, will come out on the top in the current health crisis.
Rural tilt - Bharat is pulling ahead of India as the economy grapples with strain. Mutual fund schemes with bigger exposure towards rural economy oriented companies are positioned to deliver amid sustained and better 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 have come to the fore. No longer are markets languishing at lows. Schemes with good exposure towards stocks where the margin of safety is high and there is good earnings visibility, are likely to out-perform. Higher exposure towards the defensive sector and massive underweight towards the BFSI sector are poised for growth.
Anupriyaa R. Bhat is managing partner, M/s. Aniram
The opinions expressed in this article are those of the author’s and do not purport to reflect the opinions or views of THE WEEK.