SBI Focused Equity Fund: Generating Stellar Returns through a Concentrated Portfolio

SBI Focused Equity Fund is the largest scheme in the Focused Mutual Fund category that has displayed superior performance over longer time periods and has rewarded its investors with reasonable risk-adjusted returns.

Data as on February 01, 2022
(Source: ACE MF)

SBI Focused Equity Fund is a well-managed focused equity fund that holds spot among top quartile performers across various time frames. The fund has distinctly outperformed its benchmark S&P BSE 500 - TRI across most time periods. In the last 1-year period, the fund outpaced the index and the category average by a remarkable margin of around 8 percentage points. Over the long term horizons of 5-year and 7-year, SBI Focused Equity Fund has managed to generate an alpha of about 2.5-3.5 percentage points over the benchmark index and also outpaced many of its peers.

With a standard deviation of 20.1%, SBI Focused Equity Fund has shown lower volatility compared to the benchmark (22.06%) and the category average (21.59%). Moreover, it has generated superior risk-adjusted returns for its investors. Its Sharpe Ratio of 0.28 is much ahead of the benchmark and among the best in the focused fund category, indicating its ability to generate decent premium for the level of risk taken.

Investment strategy of SBI Focused Equity Fund

Being a focused fund, SBI Focused Equity Fund is mandated to take high conviction bets, where the total number of securities in the portfolio would be equal to or under 30. It can invest minimum 65% of its assets in equity and equity-related instruments, while it has the flexibility to invest up to 35% of its assets in debt and money market instruments. However, the fund has avoided holding high exposure in debt and money market instruments. The fund also holds flexibility to invest up to 35% of its assets in foreign securities.

SBI Focused Equity Fund follows the bottom-up approach to stock picking and takes high conviction bets in high growth-oriented companies with its portfolio spread across market capitalisation, sectors, and geographies. Aiming to benefit from high growth-oriented opportunities, the fund manager at times churns a significant portion of the portfolio to accommodate new attractive-looking stocks by replacing the existing portfolio holdings. The turnover ratio of the fund in the last one year ranged 45%-65%, signifying a moderate churn of stocks in the portfolio.

As of December 31, 2021, SBI Focused Equity Fund held a compact portfolio of 23 domestic stocks and 3 overseas stocks diversified across various sectors. The top 10 stocks constitute 48.8% of its portfolio, and mainly include some of the known large-cap names, such as Muthoot Finance, Divi's Laboratories, Bharti Airtel, HDFC Bank, and ICICI Bank, along with mid-cap names, such as P&G Hygiene and Healthcare, Max Healthcare Institute, and Hatsun Agro Products.

In the last one year the fund has maintained an average exposure of 10.7% to overseas equities, wherein it holds major global corporations such as Alphabet Inc, Netflix Inc, and NVIDIA Corporation in its portfolio. Of these, Alphabet Inc and Netflix Inc figure among the fund's top 10 holdings.

Among domestic equities, SBI Focused Equity Fund gained immensely from its holdings in Avenue Supermarts, ABB India, Solar Industries India, Tube Investments of India, Hatsun Agro Products, P&G Hygiene and Healthcare, Bharti Airtel, Torrent Power, and Bajaj Finance in the last one year.

SBI Focused Equity Fund's portfolio is currently diversified across a host of cyclical and defensive sectors. Around 22.7% of the fund's portfolio is allocated to stocks in the Banking and Financial sector, followed by Consumption having an allocation of 12.3%. Healthcare Services, Telecom, Retail, Consumer Durables, Power, and Pharma stood among other prominent sectors in the portfolio, with exposure around 5% to 8% in each. The top 10 sectors (including offshore equities) together accounts for around 85.2% of its assets.

Suitability

SBI Focused Equity Fund has a track record of timely identifying fundamentally sound stocks; this has helped reward its investors well in the past. The fund not only has the ability to protect the downside in depressed market conditions, but also participates well in recovery and market rallies.

Having a portfolio with significant allocation to mid-caps, SBI Focused Equity Fund is bound to witness extreme volatility in conditions when the broader market is under pressure or see a sharp correction. Nonetheless, its predominant allocation to large-caps provides stability to the portfolio, while its exposure to international equities can aid in diversification across geography.

The aggressive investment mandate along with significant allocation to mid-caps and some allocation to small-caps makes SBI Focused Equity Fund suitable only for investors having a higher risk appetite and a long term investment horizon of 5-7 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.

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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;

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