IIFL Focused Equity Fund: Generating Alpha through a Concentrated Portfolio

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

Past performance is not an indicator of future returns
Data as on April 13, 2022
(Source: ACE MF)

IIFL Focused Equity Fund has constantly maintained a clear lead over its benchmark S&P BSE 500 - TRI as well as most of its category peers across various time frames. With this, the fund has managed to build a strong performance track record. Over the last 3-year period, the fund has outperformed the benchmark and the category average by around 7 percentage points. Even on the longer 5-year and 7-year horizon, it has outpaced the benchmark by around 3.5-4 percentage points.

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

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Investment strategy of IIFL Focused Equity Fund

Classified under the Focused Funds category, IIFL Focused Equity Fund has a mandate to allocate a minimum of 65% of its assets in equities investing in a maximum of 30 stocks. Accordingly, the 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 a 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 uses 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 ranged from 30% to 50%, signifying moderate churning in the portfolio.

Being a Focused Fund, IIFL Focused Equity Fund invests in a concentrated portfolio of 25-30 high conviction stock ideas. As of March 31, 2022, the fund held 30 stocks in its portfolio. Top large-cap names like ICICI Bank, HDFC Bank, Infosys, L&T, and Axis Bank currently figure among the other top holdings in the fund's portfolio. The top 10 stocks together account for 52.6% of its assets. Some of these stocks have been part of the fund's portfolio for over 2 years now.

IIFL Focused Equity Fund benefitted immensely from names like SRF, Infosys, ICICI Bank, Bharti Airtel, L&T Infotech, Bajaj Finance, and Cyient, that contributed over 15% to its absolute gains in the last one year. L&T, Apollo Tricoat Tubes, SBI, Divi's Laboratories, Axis Bank, etc. were among the other major contributors to its performance.

IIFL Focused Equity Fund's portfolio is skewed towards stocks in the Banking and Financial sector that forms 33.7% of its assets. It also held major allocation to Infotech, Engineering, Auto & Auto Ancillaries, Telecom, Pharma, and Consumption that form another 51% of its holdings. Some other core sectors in its holdings are Consumer Durables and Petroleum Products. The fund's portfolio is fairly diversified across cyclical, defensive, and sensitive sectors.

Suitability

Over the last few years, IIFL Focused Equity Fund has outperformed many of its prominent peers in the category. The fund has achieved this without exposing the portfolio to unnecessary risk. Notably, its Sharpe Ratio is currently the best in the focused category. With this, the fund has rewarded its investors with superior risk-adjusted returns.

IIFL Focused Equity Fund's portfolio is fairly-diversified across a range of stocks which it holds with a long-term view. However, at the sector level, the fund's allocation to certain sectors such as Financials and Infotech is on the higher side. The fund may witness higher volatility in case one or more of these sectors temporarily move out of favour.

IIFL Focused Equity Fund is suitable for investors looking to earn decent alpha from 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;

14. Murali Ananthan Krishnan.

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.

1. Neither QIS nor it's Associates have received any compensation from the subject Company in the past twelve months;

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1. The Research Analyst has not served as an officer, director or employee of the subject Company.

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