Can ITI Multicap Fund Find a Place in Your Portfolio?
May 02, 2019

Author: Aditi Murkute

(Image source: Image by dawnfu on Pixabay)

ITI Mutual Fund is promoted by ITI Group, which is the promoter of the first private sector fund house Pioneer ITI Mutual Fund, that was taken over by Franklin Templeton Mutual Fund in 2002. ITI Group is a conservative, emerging and innovative financial services company which has interest in various financial services businesses.

ITI Mutual Fund believes that most investors lack the requisite expertise for deciding allocation between different types of fund segments. Each of the individual segments work differently in the different market cycle. For an investor, it may be a difficult task to navigate through different market segments and exposures.

Hence, the fund house launched Multi-cap fund as its first equity offering, ITI Multicap Fund. It is an open-ended equity scheme that will invest across large cap, mid cap, small cap stocks.

What does a Multicap strategy mean?

Multi-Cap funds seek to invest across market capitalization segments from large cap to midcap to small caps. The fund manager has complete flexibility to manage allocation between different sectors, market cap segments, styles etc.

At present as per the SEBI guidelines the Large Cap, Mid Cap & Small Cap companies are classified as below:

  1. Large Cap: 1st -100th company in terms of full market capitalization.

  2. Mid Cap: 101st -250th company in terms of full market capitalization.

  3. Small Cap: 251st company onwards in terms of full market capitalization.

In the absence of any restriction or limit on investment in any particular market cap, multi-cap funds enjoy the freedom to move from one market cap segment to another, based on the market sentiments and the conviction of the fund manager, with an aim to generate higher alpha for its investors.

ITI Mutual Fund will adopt a differentiated approach of portfolio construction that will be benchmark agonistic, while the investment universe will be divided into core stocks universe and tactical stocks universe. As mentioned by the fund house, under normal circumstances the fund will be at least 90% invested in equities. Its typical portfolio construction would include 35-40 stocks.

For the purpose of allocation between Large, Mid and Small Cap segments it will follow a unique internal research-driven process which is based on valuation, expected earnings growth, market and business cycles.

The fund would typically maintain a minimum 40% allocation towards Large Caps and can go up to 100% (during the initial deployment period, the fund will gradually build a portfolio towards the stated allocation) based on market conditions. Allocation to large caps would provide stability to the portfolio with reasonable returns, whereas its exposure to Mid and Small Caps would be alpha accretive.

[Read: Why You Should Not Ignore Personalized Asset Allocation While Investing]

Note that on the risk-return curve, a multi-cap fund fits in between large-cap funds and mid-and small-cap funds. So, do note that although multi-cap funds come with some safety element of large caps, they also carry the risk associated with mid and small caps. Hence investors should consider investing in multi-cap funds only if their risk appetite permits, i.e. it is high, and if the investment time horizon is at least 5 years.

[Read: Best Multi-Cap Funds That Could Prove To Be Wealth Multipliers In 2019!]

Table 1: NFO Details

Type An open-ended equity scheme investing across large cap, mid cap, small cap stocks. Category Multicap Fund
Investment Objective To generate long-term capital appreciation from a diversified portfolio that predominantly invests in equity and equity-related securities of companies across various market capitalisation.

However, there can be no assurance that the investment objective of the Scheme will be realised.
Min. Investment Rs 1,000 and in multiples of Re 1 thereafter Face Value Rs 10 per unit
Plans • Regular

• Direct
Options • Growth*

• Dividend (Pay-out and Reinvestment*)

*Default option
Entry Load Nil Exit Load • Within 12 (twelve) months from the date of allotment- 1%.

• Beyond 12 (twelve) months from the date of allotment - NIL
Fund Manager Mr George Heber Joseph and Mr Pradeep Gokhale Benchmark Index Nifty 500 Total Return Index
Issue Opens: April 25, 2019 Issue Closes: May 09, 2019
(Source: Scheme Information Document)

How will the scheme allocate its assets?

Under normal circumstances, the scheme's asset allocation will be as under:

Table 2: ITIMF's Asset Allocation

Instruments Indicative Allocation (% of Net Assets) Risk Profile
Equity and Equity related securities across market cap 65 100 Medium to High
Debt & Money Market Instruments^ 0 35 Low to Medium
The scheme will invest across large cap, mid cap and small cap stocks. The Fund would adopt the list of Large Cap, Mid Cap, Small Cap companies prepared by AMFI for this purpose in accordance with the SEBI circular no. SEBI/HO/IMD/DF3/CIR/P/2017/114 dated October 06, 2017 and SEBI/HO/IMD/DF3/CIR/P/2017/126 dated December 04, 2017. If there is any updation in the list of large cap, mid cap, small cap companies, the fund manager would rebalance the portfolio (if required) in line with the updated list, within a period of one month.
At present the Large Cap, Mid Cap & Small Cap companies are classified as below:
a) Large Cap: 1st -100th company in terms of full market capitalization.
b) Mid Cap: 101st -250th company in terms of full market capitalization.
c) Small Cap: 251st company onwards in terms of full market capitalization.
^Money market instruments include Commercial Papers, Commercial Bills, Treasury Bills, Tri-Party Repo, government securities having unexpired maturity up to one year, CMB, Tri-Party Repo, Certificate of Deposits, Usance Bills, Repo (with approved government & Corporate Debt Securities as collateral), and any other like securities as specified by the RBI from time to time.
(Source: Scheme Information Document)

What will be the Investment Strategy?

ITI MultiCap Fund is a diversified equity fund that will invest predominantly in equity and equity related securities through allocation in companies across different market capitalisation, i.e. Large Cap, Mid Cap and Small Cap.

The investment approach will be primarily bottom-up stock picking - where investments will be selected primarily based on specific criteria relevant to the company in question rather than general macroeconomic considerations. There will be no bias towards any market cap size or any sector.

The Scheme will always endeavour to remain fully invested in equity and equity related instruments. The fund has the flexibility to take exposure in various derivatives instruments - for the purpose of hedging, portfolio balancing and optimising returns.

Who will manage ITIMF?

ITI MultiCap Fund will be co-managed by Mr George Heber Joseph and Mr Pradeep Gokhale.

Mr George Heber Joseph is the Chief Executive Officer (CEO) and Chief Investment Officer (CIO) at ITI Mutual Fund. He holds a bachelor's degree in English language & Literature (BA) and commerce (BCom). Mr George is also a qualified member of associate member of Chartered Accountants of India and an associate member of Cost and Management Accountants of India. He has over 16 years of work experience in Fund Management, Equity Research and Capital Markets.

Prior to joining, ITI Mutual Fund, he was working as a Senior Fund Manager (Vice President Grade & Key Management Personnel) at ICICI Prudential Asset Management Co. Ltd. handling two flagship funds. He was associated with the Fund Management Team of ICICI Prudential Asset Management Company Limited for nearly a decade tracking various sectors and a wide variety of stocks. During his tenure, he was also heading the Portfolio Management Services Division, was responsible to oversee fund managers activities, managing research analysts, performance measurement and work as a sounding board for fund managers. Before that, in his previous assignments, he has been associated with organisations like DSP Merrill Lynch Ltd, Wipro Ltd, MetLife India, Cholamandalam Investments & Finance Company Ltd and Tanfac Industries Ltd where he has handled fund management and corporate treasury responsibilities.

Mr Pradeep Gokhale joined ITI mutual fund as the Senior Fund Manager. He has a bachelor's degree in commerce (B. Com), is a Chartered Accountant and CFA. He has a work experience of over 23 years in Fund Management, Equity Research, Credit Evaluation & ratings.

Before joining the fund house, he has been associated with the Fund Management Team of Tata Asset Management for 14 years. Prior to joining Tata Asset Management, he was Head of Financial Sector and Securitisation Ratings at CARE Ratings Ltd. He has also worked in corporate finance departments of companies like Bombay Dyeing, Tata International and Lubrizol India Ltd.

The outlook of ITI Multicap Fund:

ITI Multicap Fund will aim for long term capital appreciation from a diversified portfolio of stocks spread across market caps. To achieve its objective, the fund will follow an equity investment philosophy (as given in the product brochure) represented by "SQL" focusing on three main pillars.

"S": Margin of Safety,

"Q": Quality of the business

"L": Low Leverage.

The fund house states that "this "SQL" philosophy is aligned to our equity investment objective of 'Long Term Wealth Creation'. This investment philosophy which we think would stand the test of times and follows from our overriding belief that "If we avoid the losers, the winners will take care of themselves." The fund will adopt a differentiated approach to construct the portfolio, that will be benchmark agnostic. Besides to manage the risk during bullish and bearish market scenarios it will follow a differentiated strategy and suitably align the portfolio.

The fund will follow bottom-up approach of stock selection that will focus on investing in good and sound businesses which are well understood while constructing the portfolio. Given the asset allocation, the fortune of the Multicap fund will be closely hinged onto the performance of the stocks held in the portfolio.

Constructing the portfolio would be a challenging task for the fund managers in the present scenario. While the S&P BSE Sensex is already near its 52-week high, the earnings will have to justify the valuations. The trail P/E of the S&P BSE Sensex and the large-cap index is currently at 28x and 26x. Even the P/E of the S&P BSE MidCap index has scaled to around 30x. Calling any of these levels as 'cheap' would be an imprudent judgement. The S&P BSE SmallCap Index is trading at a negative P/E of around 102x, but that doesn't mean valuation-wise small-caps look attractive. What it means is, many constituents of the BSE SmallCap index are making losses thereby contributing negatively to its growth.

Hence, how the fund managers construct the portfolio is crucial and remains to be seen. As it will not be an easy year for wealth creation and volatility will be obvious.

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This article first appeared on Certified Financial Guardian.  

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