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SBI Emerging Businesses Fund: A fund to look out for in the midcap space
April 11, 2014

Amidst the rising bull market, we put SBI Emerging Businesses Fund under our research lens and run a thorough analysis on the fund. Here are some of the key findings.


Author : iFAST Research



 Fund Managers on Short-Term Funds

SBI Emerging Businesses Fund and R. Srinivasan have become synonymous in the Mutual Fund industry. The fund which is about to enter its 10th year of existence was introduced into our Recommended Funds list for the first time in January 2013 and continues its good innings this year as well. When Srinivasan took charge of this fund in May 2009, the corpus was a meagre INR 150 crore which has grown to around INR 1,253 crore by February 2014. If you had asked Srinivasan in 2009, if this fund could be included in a portfolio whose main aim was to create a surplus for children’s future, then the answer would have been a big no. Four years later, the answer to the same question is in the affirmative. The reason for this u-turn can be traced to the change in the strategy that has been brought about in the fund over a period of time. Initially, when the reins of the fund were handed over to Srinivasan, the stock picks were entirely based on his conviction and hence it was termed as a “high risk-high return” fund. However, as the fund began gaining acceptability among investors, the strategy has changed. In Srinivasan’s own words: “Due to the increase in corpus and our insistence to maintain concentration, the high return outlook has changed to moderate return. At the same time, the risks in terms of the nature of businesses/stocks that we own have also come off. However, technical risks, in terms of concentration, tracking error and a down-the-curve cap exposure, remain”.

Although we had started recommending SBI Emerging Businesses Fund only in 2013, this fund had caught our attention in 2012 when we ran our model to select the best funds for that particular year. During the year, this fund was among the top 10 performers in the midcap segment as per our model. However, we waited for a year to see if the fund would be able to clear the filters in our next review as well. To our pleasant surprise, the fund turned out to be the best performer in the midcap segment and there has been no looking back since then.

Investment Strategy

As per the Scheme Information Document (SID), the fund’s mandate is to invest into emerging business themes primarily based on the export/outsourcing opportunities and/or global competitiveness of such themes. The fund will focus on emerging domestic investment themes. When we had a discussion with the fund manager regarding this mandate, he was very candid about the fact that this is a market capitalisation agnostic fund. It may invest into large, mid and/or small cap stocks in any proportion based on the market conditions to make the most of different market phases. We went further and analysed the market capitalisation trends during the last 3 years (March 2011-February 2014) and it clearly shows that the average allocation into largecaps, midcaps and smallcaps has been in the range of 34%, 19% and 36% respectively. As all our funds on the platform are classified on the basis of the SID, we stuck to the fund’s mandate given in the same and have classified the fund as a midcap fund. When we asked Srinivasan about this disconnect, he answered: “The fund has the flexibility to invest across market caps. However, to maintain liquidity on a portfolio basis, we maintain a meaningful proportion in largecaps”.

According to Srinivasan, the salient features of this fund can be summed up in four points:

  • High Conviction: The portfolio invests in 20-30 stocks based on return expectations.
  • Concentrated: The current top 10 holdings amount to 51.94%.
  • Flexibility: Since there are no sector holding limits, the portfolio is more flexible thereby allowing the fund manager to hold the sectors that the fund manager believes are the best suited for the portfolio.
  • Bottom-Up: Stock selection is from a bottom-up perspective which uses a combination of factors including business model, profitability, growth, management and valuations.

A detailed analysis of the portfolio clearly shows that Srinivasan is walking the talk when it comes to the way he manages this fund. For instance, during our period of analysis, the fund on an average maintained around 26 stocks in the portfolio. In addition to this more than 50% of the corpus has always been invested into the top 10 holdings during the same time period. In short, both these data points clearly show that the fund is based on high conviction and has a very concentrated portfolio.

One of the biggest USP of this fund is the bottom-up approach followed by the fund manager which has worked in its favour during the last few years. Srinivasan’s passion to follow this approach can be seen from the hours that he can spend talking about the cherry picking that he does when he selects the stocks for his portfolio.

As on February 2014, the fund had around 25 stocks out of which 9 have been a part of the portfolio for all the 36 months under study. These include names like Page Industries, Goodyear India, Agro Tech Foods and Hawkins Cookers whose average allocation has been in the range of 4% to 7%. On the other hand, some of the stocks like KCP, Texmaco Infrastructure & Holdings, Globus Spirits, Sagar Cements and McDowell Holdings have a miniscule allocation in this fund (0.9% to 2.29%) despite it being there for a long time. This means that although 36% of the stocks have been in the portfolio for 3 years, only a very small component of the corpus is being diverted to these stocks. This is a clear indication that active management is the mantra of this fund.

On quizzing Srinivasan why he picked up some of the stocks, the answers were on these lines.

Hawkins Cookers: High corporate governance standards, strong brand equity which hasn’t been exploited yet and very high returns on capital.

Goodyear India: Pedigree and inexpensive valuations.

Procter & Gamble: Strong brand franchise, high potential growth in the category combined with superior returns on capital.

Redington India: Strong management execution in a seemingly difficult sector and inexpensive valuations.

SpiceJet: M&A activity and absolute valuations.

Although Srinivasan has been very vocal about the fact that he does not show any preference towards any sector, an interesting observation here is that there has been a consistency in the sectoral picks during the last 1 year. This could have been a coincidence but we thought it better to share the details with our investors. There have been 4 sectors which have been among the top 5 sectoral picks during the period. The sectors are Consumer-Non-Durables, Trading, Finance and Banking having an average allocation of 20.54%, 9.50%, 9.25% and 8.45% respectively.

Performance

As per our sample, SBI Emerging Businesses Fund is the best performing midcap fund on our platform. Suppose on March 1, 2011, if an investor had parked a surplus of INR 10,000 each in the fund and its benchmark (S&P BSE 500) then on Feb 28, 2014, the corpus would have been INR 14,530 and INR 10,895 respectively.

Chart 1: Relative Performance of SBI Emerging Businesses Fund vis-a-vis S&P BSE 500

FMI

Our Take

We at iFAST Financial, strongly believe that one of the biggest contributors to the success of this fund is the prudent stock picking done by Srinivasan in the portfolio. There are investors who have been concerned about the huge volatility that the fund went through in the last 1 year. Although the fund manager has been showing some bias towards largecap stocks, the risk in terms of concentration and aggressive exposures being taken into the mid and smallcap stocks are definitely going to be a part and parcel of this fund. Hence, volatility will be a part of this fund and only those investors with a moderately aggressive and aggressive risk appetite should park their surplus into this fund for a time period of 5 years. Our conviction lies in the active management of the portfolio along with the confidence that we have seen in the fund management team to take this strategy forward.

Details of SBI Emerging Businesses Fund

Investment Objective

The investment objective of the Emerging Businesses Fund would be to participate in the growth potential presented by various companies that are considered emergent and have export orientation/outsourcing opportunities or are globally competitive. The fund may also evaluate Emerging Businesses with growth potential and domestic focus.

Inception Date

October 11, 2004

Benchmark Index

S&P BSE 500

Fund Manager

R. Srinivasan

AUM (28 February 2014)

Rs. 1,253.07 Crores

Exit Load within 12 months

1%

 

 


Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website.



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