IIFL Focused Equity Fund: Identifying High-Conviction Ideas

Nov 03, 2022

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Focused Funds are equity mutual funds that take concentrated bets in high-conviction and high-quality names. Such funds focus on investing in a limited number of stocks (maximum 30), where the fund manager has high conviction.

The success of a Focused Fund depends on the stock-picking skills and abilities of the fund manager. Hence, it is important to stick to experienced fund managers who have proven their ability to take timely calls and have been capable of generating significant alpha for investors.

IIFL Focused Equity Fund is a Focused Fund that has registered superior performance and generated market-beating returns for its investors across various time periods, thus compensating well for the level of risk taken.

Graph 1: Growth of Rs 10,000 if invested in IIFL Focused Equity Fund 5 years ago

IIFL Focused Equity Fund aims to generate long-term capital appreciation by investing in a concentrated portfolio of maximum of 30 high-conviction stock ideas. The fund follows a multi-cap approach to invest across market cap segments but with a large-cap bias. The fund aims to identify strong growth companies offering favourable risk-reward ratios and restricts allocation towards value traps and short-term fads. After recording a good start during its initial years, the fund’s performance deteriorated between 2017 and 2018 causing a noticeable underperformance compared to the benchmark and category peers. Nonetheless, it made a strong comeback post-2018 and now stands among the top quartile performers in the Focused Fund category. IIFL Focused Equity Fund’s robust performance in the past few years has attracted investors’ attention, helping it triple the AUM in the last 2 years. Over the last 5 years, IIFL Focused Equity Fund has registered a growth of around 17.1% CAGR as against 12.6% CAGR delivered by its benchmark S&P BSE 500 - TRI. An investment of Rs 10,000 in the fund 5 years back would now be valued at Rs 22,011, while a simultaneous investment in its benchmark would now be worth Rs 18,072.

Graph 1
Past performance is not an indicator of future returns
Data as on October 31, 2022
(Source: ACE MF)
 

Table: IIFL Focused Equity Fund's performance vis-á-vis category peers

Scheme Name Corpus (Cr.) 1 Year 2 Year 3 Year 5 Year 7 Year Std Dev Sharpe
Quant Focused Fund 143 12.26 35.91 22.62 14.71 15.50 23.33 0.23
ICICI Pru Focused Equity Fund 3,620 5.54 32.93 22.46 13.95 14.46 20.63 0.24
IIFL Focused Equity Fund 3,231 1.81 29.22 22.05 17.08 17.72 23.25 0.23
Nippon India Focused Equity Fund 6,039 6.30 37.47 21.97 12.39 14.66 26.30 0.22
Franklin India Focused Equity Fund 8,072 7.86 39.12 20.97 13.51 14.78 25.56 0.21
HDFC Focused 30 Fund 2,329 16.99 43.22 20.52 11.47 13.36 24.48 0.21
Sundaram Focused Fund 736 1.99 29.40 19.65 13.92 14.43 21.10 0.21
SBI Focused Equity Fund 27,607 -3.52 27.63 17.50 15.06 15.27 21.11 0.19
Aditya Birla SL Focused Equity Fund 5,712 0.73 24.95 16.08 11.11 12.90 22.09 0.17
IDFC Focused Equity Fund 1,313 -0.74 17.62 14.20 8.51 12.53 22.34 0.16
S&P BSE 500 - TRI 3.91 28.67 18.38 12.56 14.07 23.21 0.19
Returns are point to point and in %, calculated using Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on October 31, 2022
(Source: ACE MF)
*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.
 

IIFL Focused Equity Fund has been a top-quartile performer over longer time frames. The fund maintained a clear lead over its benchmark S&P BSE 500 - TRI as well as most of its category peers and generated noticeable alpha between 2019 and 2021. With this, IIFL Focused Equity Fund has managed to build a strong long-term performance track record. Over the longer 3-year, 5-year, and 7-year periods, it has outpaced the benchmark by around 3-4 percentage points. Even though the fund's performance has slipped in the last one year, it has the potential to bounce back strongly.

Its outperformance in the last few years has helped the fund outscore in terms of risk-adjusted returns and stand strong vis-a-vis its category peers. IIFL Focused Equity Fund has recorded volatility in line with the benchmark and the category average but clearly stands out in terms of risk-adjusted returns as denoted by the Sharpe ratio.

IIFL Focused Equity Fund: Identifying High-Conviction Ideas
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Investment strategy of IIFL Focused Equity Fund

Classified under the Focused Funds category, IIFL Focused Equity Fund has the mandate to allocate a minimum of 65% of its assets in equities investing in a maximum of 30 stocks. Accordingly, IIFL Focused Equity Fund holds a compact portfolio of around 30 high-conviction stocks. The scheme endeavours to identify the sectors that are likely to do well in the medium term, based on the business cycle of the economy and take focused exposure to securities of companies in identified sectors. The sectors are actively monitored and changes are made to invest in sectors that will benefit from the current stage of the business cycle.

IIFL Focused Equity Fund utilises the SCDV (Secular, Cyclical, Defensives and Value Trap) investment framework to identify high-conviction stocks and determine its weightage in the portfolio:

S- Secular - Companies with consistent ROE & PAT growth > 15%

C- Cyclical - Companies with PAT growth > 15% but ROE < 15%

D- Defensive - Companies with ROE > 15% but PAT growth < 15%

V- Value Traps - Companies with both ROE & PAT growth < 15%

IIFL Focused Equity Fund utilises the bottom-up approach to pick stocks across market cap segments but maintains a large-cap bias. The turnover ratio of the fund in the last one year has been in the range of 20% to 40%, signifying low churning in the portfolio.

Graph 2: Top portfolio holdings in IIFL Focused Equity Fund

Graph 2 Graph 2
Holding in (%) as of September 30, 2022
(Source: ACE MF)
 

Being a Focused Fund, IIFL Focused Equity Fund holds a concentrated portfolio of 25-30 high-conviction stock ideas. As of September 30, 2022, IIFL Focused Equity Fund held 30 stocks in its portfolio. Top large-cap names like ICICI Bank, HDFC Bank, Infosys, Bharti Airtel, and L&T currently figure among the top holdings in the fund's portfolio. Crompton Greaves Consumer Electricals is the only stock from the lower market cap in its top holdings. The top 10 stocks together account for 48.8% of its assets. Some of these stocks have been a part of the fund's portfolio for over 2 years now.

In the last one year, IIFL Focused Equity Fund has benefitted the most from its holdings in ICICI Bank, Apollo Tricoat Tubes, CCL Products (India), SBI, and Bharti Airtel. However, the fund's holding in Infosys, L&T Infotech, BPCL, Cyient, and Divi's Laboratories, among others, eroded some of its gains.

IIFL Focused Equity Fund's portfolio is skewed towards stocks in the Banking and Financial sector that collectively form nearly one-third of its assets. It also held major allocation to Infotech, Engineering, and Auto & Auto Ancillaries that form another 35% of its holdings. Some other core sectors in its holdings are Telecom, Consumer Durables, and Pharma, among others. IIFL Focused Equity Fund's portfolio is fairly diversified across cyclical, defensive and sensitive sectors.

 

Suitability

IIFL Focused Equity Fund has built a commendable performance track record in a shorter time span and rewarded investors across the market phases it has witnessed so far. The fund has achieved this without exposing the portfolio to unnecessary risk. Notably, its Sharpe ratio is currently among the best in the focused fund category, thus rewarding its investors with superior risk-adjusted returns.

IIFL Focused Equity Fund is benchmark agnostic. The fund manager follows the business cycle investment approach to determine sector allocation according to the probability of whether they will outperform or underperform. He takes focused exposure in sectors that are likely to do well in the medium to long term. This strategy can help IIFL Focused Equity Fund to deal with market volatility going ahead and generate decent alpha for its investors.

IIFL Focused Equity Fund is suitable for investors looking to earn decent alpha through a concentrated portfolio of high-conviction stocks with a long-term horizon of at least 5 years.

 

Warm Regards,
Divya Grover
Research Analyst

 

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Note:  This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

 

DISCLOSURE AS PER SECURITIES AND EXCHANGE BOARD OF INDIA (RESEARCH ANALYSTS) REGULATIONS, 2014

About the Company including business activity

Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989.

QIS was promoted by Mr Ajit Dayal with an objective of providing value-based information/views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.

'PersonalFN' is a service brand of QIS and was started in the year 1999. In 1999, the Company registered the Domain name www.personalfn.com for providing information on mutual funds and personal financial planning, financial markets in general, etc. and services related to financial planning and research in various financial instruments including mutual funds, insurance and fixed income products to customers. It offers asset allocation and researched investment recommendations through its financial planning services.

Quantum Information Services Private Limited (QIS) is registered as Investment Adviser under SEBI (Investment Adviser) Regulations, 2013 and having Registration No.: INA000000680. In terms of the second proviso to Regulation 3 (1) of SEBI (Research Analysts) Regulations, 2014 the Company is not required to obtain Certificate of registration from SEBI.

Disciplinary history

There are no outstanding litigations against the Company, its subsidiaries and its Directors.

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Details of associates

  1. Money Simplified Services Private Limited;

  2. PersonalFN Insurance Services India Private Limited;

  3. Equitymaster Agora Research Private Limited;

  4. Common Sense Living Private Limited;

  5. Quantum Advisors Private Limited;

  6. Quantum Asset Management Company Private Limited;

  7. HelpYourNGO.com India Private Limited;

  8. HelpYourNGO Foundation;

  9. Natural Streets for Performing Arts Foundation;

  10. Primary Real Estate Advisors Private Limited;

  11. HYNGO India Private Limited;

  12. Suresh Lulla;

  13. I V Subramaniam.

Disclosure with regard to ownership and material conflicts of interest
  1. ‘subject company’ is a scheme on which a buy/sell/hold view or target price is given/changed in this Research Report;

  2. Neither QIS, it's Associates, Research Analyst or his/her relative have any financial interest in the subject Company;

  3. Neither QIS, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one per cent or more securities of the subject Company, at the end of the month immediately preceding the date of publication of the research report;

  4. Neither QIS, it's Associates, Research Analyst or his/her relative has any other material conflict of interest at the time of publication of the research report except that QIS (PersonalFN) is, as per SEBI (Mutual Funds) Regulations 1996, an associate / group Company of Quantum Asset Management Company Private Limited and Trustees and Sponsor of Quantum Mutual Fund (QMF) and to that extent there may be conflict of interest while recommending any schemes of QMF. However, any such recommendation or reference made is based on the standard evaluation and selection process, which applies uniformly for all Mutual Fund Schemes. The payment of commission (upfront / annualized & trail), if any, for any Schemes by QMF to QIS (PersonalFN) is also at arm's length and as per prevailing market practices.

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  2. QIS or the Research Analyst has not been engaged in market making activity for the subject Company.

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Quantum Information Services Private Limited CIN: U65990MH1989PTC054667 Regd. & Corp. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai - 400 021

Email:info@personalfn.com Website: www.personalfn.com Tel.: 022 61361200 Fax.: 022 61361222 SEBI-registered Investment Adviser. Registration No. INA000000680, SEBI (Investment Advisers) Regulation, 2013



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