Kotak Select Focus - Slow and Steady wins the race
August 7, 2015
This is our detailed analysis on Kotak select Focus Fund.
Author : iFAST Research
KOTAK SELECT FOCUS
Slow and steady wins the race
Kotak Select Focus is one of the best performing funds in the multi-cap category on our platform that made it to our list of recommended funds for the first time in 2015. A multi cap fund with a bias towards the large cap space, Kotak Select Focus has made it to our portfolios as well for the first time this year. It is an irony that this fund, managed by Harsha Upadhyaya has replaced UTI Opportunities Fund in our portfolios, which was once managed by Harsha himself during his previous stint at UTI Mutual Fund.
The SID outlines the investment strategy of the fund as given below.
The Fund Manager will generally invest in a few selected sectors, which in the opinion of the fund manager have potential to grow. To that extent it would be a concentrated strategy but managed actively. Moreover there will not be any restrictions in terms of investment in a single sector or cap on floor of investment per sector. There will be concentration in the portfolio on certain select sectors, which are in the opinion of the fund manager expected to do well. The selection of sectors would be driven primarily by the growth prospects and valuations of the businesses over a medium to long term as per the discretion of the fund manager. The investment strategy of the AMC is directed to investing in stocks, which, in the opinion of the Investment Manager, are priced at a material discount to their intrinsic value.
Before getting into the details of the fund, we quizzed Upadhyaya on how he would describe the portfolio in a nutshell. Upadhyaya's explanation can be summed up as:
Fund Manager Speaks:
*"Basically, Kotak Select Focus is a diversified equity fund where we can go up to 50% into Mid-caps. The investment approach has been top-down, wherein we select few sectors which in our opinion are expected to outperform the overall broad market. We take concentrated position in those few sectors and then try to outperform the Benchmark. In order to control risk we don't take concentrated position at stock level but only consider it at sector level. Hence, there will be about 45 stocks and a single sector will not have more than 33% allocation in the portfolio. There will always be a minimum of four sectors in the fund. "
* Above given explanation on management of Fund is based on current strategy adopted by the Fund Manager for managing the scheme. The Fund Manager reserves the right to manage portfolio differently in the interest of investors.
The investment mandate gives the Fund Manager the flexibility to invest in companies across market capitalization. However, a detailed analysis of the portfolio shows that the fund is biased towards the large cap space with the allocation in the same having increased from 77% to 85% during May 2012 to April 2015. Another observation that we have made is that the fund has been gradually reducing the allocation into mid cap stocks from 18% in May 2012 to 9% by April 2015.
Fund Manager Speaks:
"We internally classify top 100 stocks by market capitalisation as large caps, and the rest as mid and small cap stocks. Based on this classification, the midcap allocation in Kotak Select Focus has generally ranged between 20% to 35%."
iFAST definition of market capitalization is given below:
Market Capitalization Range
More than INR 10,000 crore
INR 10,000-INR 2000 crore
<INR 2000 crore
The fund as on April 2015, held 52 stocks, out of which 9 of them have been a part of the portfolio during the entire 36 months of study.
ICICI Bank is the only stock which has been among the top 5 picks during the entire period of study.
As far as the sectoral allocation goes, a trend that we have observed is that since November 2012, Banks, IT-Software and Automobiles have been among the top 5 picks.
Upadhyaya discusses in detail his outlook on the over-weight and under-weight sectors in the portfolio.
Fund Manager Speaks:
As far as banks are concerned, the credit growth is about 7% as compared to more than 25% seen in the earlier cycle. This means that there is a long way for credit growth to actually gain momentum. We have seen a couple of interest rate cuts and we expect 1 or 2 such cuts in the next 12 months. This will give an opportunity for the private sector banks to gain a higher market share. This is because most of the public sector banks do not have adequate capital and also have a larger NPA issue owing to which they will be trying to set right their own balance sheet. This is the period when private sector banks can take higher share of incremental growth. We are currently neutral on the banking space. We started 2015 with an over-weight stance on banks, however as the news flow has not been strong; we are going slow in deploying incremental cash into banking stocks.
Cement sector is one of the cleanest ways to play on infrastructure activity revival in the country. The companies in this sector have strong financials and low leverage. The incremental capacity addition in the industry is far lesser than incremental demand, implying higher operating rates and hence, better pricing power in the coming years. The industry is also more consolidated in favour of larger cement companies in this cycle vis-à-vis previous cycle. The earnings growth in this sector is likely to be much stronger than the overall market over the next few years.
Auto and Auto-ancillaries
Automobile sector exhibits one of the strongest operating leverage stories in the economy. Some of the sub-sectors are already showing early signs of volume pick-up. Due to high operating leverage, the profitability is likely to increase rapidly even with a smaller uptick in volume growth. We are also positive on selective auto ancillary stocks due to the fundamental strength of those companies in their respective businesses.
We have never believed that currency is the only factor that will help the IT industry. We think currency benefit will exist for only a short time because the buyers of IT Services will obviously renegotiate and the rates will come down. In terms of business, the IT business will grow somewhere around the range of 10-12% which is reasonable, but we don't know whether this is good enough for the sector to outperform in the current scenario. There are also company / vertical specific concerns to contend with. This is the reason why we are currently under-weight on the IT sector.
Oil & Gas
In this sector, we are negative on oil and gas producers due to the negative outlook on crude price. However, we continue to like oil marketing companies as their fundamentals have structurally changed for the better due to diesel deregulation and fall in global crude oil prices. Overall, we remain underweight on the sector.
Pharmaceuticals is one of the sectors, where current valuations are much higher than historical trends. This is also a time where regulatory risks for some of the Indian pharma companies have increased. Due to these factors, the pharma exposure in the portfolio is underweight with respect to the benchmark weight.
If an investor had parked a surplus of INR 10,000 in Kotak Select Focus and its respective Benchmark, CNX 200 on May 2, 2012, then the corpus would have grown to INR 19,858 and INR 16,052 by April 30, 2015.
A peep into our Recommended Funds model during the last few years shows that Kotak Select Focus has been slowly climbing up the ranks to become the top performer in the multi cap category. The fund purely follows a strategy of taking concentrated bets in a few sectors which in turn generate alpha for the portfolio. Upadhyaya has already proved his mettle as a Fund Manager who has the proficiency to manage funds which follow a multi cap strategy. His strategy of sticking to the mandate along with the strong conviction that he has on sectors means it is only a matter of time before this fund becomes a part of an investor's core portfolio. As for our investors, this fund is currently included in our moderately aggressive and aggressive portfolios. We believe that the conservative nature and disciplined approached followed by Upadhyaya will be a big positive for these 2 portfolios which consist of funds known to be very volatile in nature.
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