Kotak Emerging Equity Fund: Identifying Growth-oriented Mid-cap Stocks

Welcome to  PersonalFN's weekly analysis on diversified equity mutual funds! In this issue, we have analysed Kotak Emerging Equity Fund, highlighting its performance, peer comparison, investment strategy, fundamentals, portfolio, and suitability.

Kotak Emerging Equity Fund is a well-managed Mid Cap Mutual Fund that has delivered benchmark-beating returns across various market phases and rewarded investors with noteworthy risk-adjusted returns.

Past performance is not an indicator of future returns
Data as on July 05, 2023
(Source: ACE MF)

Kotak Emerging Equity Fund holds a superior track record of generating market-beating returns over longer time periods. Even though the fund may sometimes trail in the benchmark, it has the potential to perform well in the long run. In the last 1-year and 2-year period, Kotak Emerging Equity Fund's performance was competitive to the category average, even though it trailed the benchmark Nifty Midcap 150 - TRI. Over the longer 5-year and 7-year time frame, Kotak Emerging Equity Fund stands among the category toppers and ahead of the benchmark.

In terms of risk-reward parameters, the volatility registered by Kotak Emerging Equity Fund is nearly in line with the benchmark index but slightly higher than the category average. Its Sharpe ratio (0.48), signifying risk-adjusted returns, is much higher when compared to the category average as well as the benchmark.

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Investment strategy of Kotak Emerging Equity Fund

Classified under the Mid Cap Fund category, Kotak Emerging Equity Fund is mandated to invest a minimum of 65% of its assets in mid-cap stocks. Accordingly, the fund holds a predominant mid-cap biased portfolio. It holds significant exposure across large-cap and small-cap stocks as well. Kotak Emerging Equity Fund makes well use of diversification and invests over 70 stocks spread across sectors in its portfolio. The fund aims to identify the hidden potential of mid-sized companies by utilising the bottom-up stock selection approach. It seeks to invest in companies that are either at their nascent or developing stage and are under-researched but have the potential to deliver higher growth in the long term. The scheme aims to invest across sectors and follows a buy-and-hold strategy to derive the full potential of the stocks. Notably, the fund has had a very low portfolio churning rate of less than 5% in the last one year.

As an AMC, Kotak endeavours to invest in stocks, which, in the opinion of the fund manager, are priced at a material discount to their intrinsic value. The process of discovering the intrinsic value is through in-house research supplemented by research available from other sources. The potential of stocks is guided by considerations such as the financial parameters of the company, reputation of the management and their track record, companies that are less prone to recessions or cycles, companies that pursue a strategy to build strong brands for their products or services, market liquidity of the stock, and so on.

Kotak Emerging Equity Fund usually holds a fairly large portfolio of stocks spread across sectors. As of May 31, 2023, the fund held as many as 78 stocks in its portfolio, with the top 10 stocks comprising around 31% of its assets. Supreme Industries is currently the top holding in its portfolio having an allocation of about 4.2%, followed by Cummins India, Schaeffler India, Persistent Systems, and PI Industries, among others. Most of these stocks have been a part of its portfolio for over two years now.

Names like Schaeffler India, Persistent Systems, Solar Industries India, Cummins India, Bharat Electronics, and SKF India have contributed immensely to the fund's performance in the last 2 years. It also benefitted hugely from its holdings in Thermax, SRF, Oberoi Realty, Supreme Industries, Ratnamani Metals & Tubes, APL Apollo Tubes, PI Industries, and AU Small Finance Bank, among many others.

In terms of sector, Engineering tops the list of allocation with an exposure of 22.5% followed by Financial Services at about 12.5%. All other sectors have allocation well within the 10% mark. Consumer Durables, Auto Ancillaries, Pharma, Construction, Fertiliser, and Cement are among the other core sectors in the fund's portfolio. The top 10 sectors together account for around 74.1% of its assets. Though Kotak Emerging Equity Fund's portfolio is inclined more towards Cyclicals and Sensitive sectors, it is fairly diversified to Defensive sectors as well.

Suitability

Kotak Emerging Equity Fund has a successful track record of generating superior returns across various market phases. It has done exceptionally well in the past few years and has established a robust long-term performance track record. The fund has stood strong during difficult market conditions and has participated well during upside market movements. Notably, its asset size has grown tremendously in the last couple of years driven by its superior performance.

Kotak Emerging Equity Fund carries an impressive track record under the supervision of Mr Pankaj Tibrewal, who is known for his expertise in the mid and small-cap space. The fund's focus on identifying high-conviction quality stocks in the mid-cap space and holding it with a long-term view has worked in its favour. Moreover, the fund has delivered in terms of risk-adjusted returns.

Kotak Emerging Equity Fund is suitable for investors who can bear the higher volatility associated with the mid-cap space and have a time horizon of at least 5-7 years.

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.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.

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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.

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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.

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; except for one of the Research Analysts holding units of Kotak Emerging Equity Fund;

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