As the S&P BSE Sensex and Nifty 50 scale new highs, mutual fund houses are delighted for two main reasons:

First, owing to their strong growth in assets – thanks to the market rally; and
Second, increased investor participation in equity mutual fund schemes as the market has been trending upwards.

On such occasions, fund houses launch a variety of schemes with unique investment objectives to attract investors. One category of schemes that came to the forefront is ‘Opportunities-style’ Funds or simply put Opportunities Funds. In 2004-05 itself, as many as five of the 11 opportunities funds came into existence, but post the global financial crisis in 2008-09, fund houses have not launched a single opportunity fund. Some opportunity funds were merged with other schemes due to their low AUM and lack of performance. So, from the looks of it, opportunities fund have made hay while the sun shined, gathering assets along the tide.

Today, while there are hundreds of equity mutual fund schemes available, opportunities-style funds are just a handful.

Are these funds worthy of your investment? PersonalFN brings you the scope…

The fund manager of an equity opportunities funds is on the constant lookout for sectors that can benefit from changes in the micro and/or macro environment. Here the fund manager seeks to take advantage of wealth creating opportunities arising out of changes in Government policies, industry specific regulations, trade agreements, among a host of other factors. The fund, facilitated by the investment mandate, can flexibly move the portfolio across market capitalisation -- large-caps, mid-caps, and small-caps – plus, even take sectoral bets.

To know more about Opportunities Funds, read this article: 5 Things You Should Know About Opportunities Funds

So, due to their dynamic investment mandate, opportunities funds tend to do much better than the index.
 

Opportunities Funds Vs. S&P BSE 200 Performance across market cycles
Data as on May 26, 2017
Returns over 1-Yr are compounded annualised
(Source: ACEMF, PersonalFN Research)

As a category, opportunities funds have outperformed the S&P BSE 200 across market cycles. Most schemes delivered higher returns than the benchmark in a bull market, while curbing the downside risk in a bear market.

As regards to their portfolio, over the past few years most opportunities funds were heavily allocated to banks, software, and pharma stocks. Banks have added immense value to the performance of these schemes. While the Nifty Bank index clocked a return of 32%, almost all the 11 funds kept an allocation in excess of 15% towards banks.

Software stocks commanded an allocation of about 7%-10% in the portfolio of opportunities funds. However, these stocks have created a lag on the performance of the schemes as this sector ran into a rough patch last year. Thus, over the past year most funds have reduced their exposure to the sector.

Likewise, the pharmaceutical sector, once a hot option, has witnessed a drop in exposure among opportunities funds. The Nifty Pharma index closed at its lowest since August 2014. Many stocks on the pharma index traded near their 52-week low. The prices eroded due to an increase in US FDA's approval for drugs that will increase competition and adversely affect their margins. This added to their woes, as several companies received negative US FDA observations and warnings that will further impact their business. As a result, the average exposure of opportunities funds have dropped from around 10% to 3-4% over the past few years. Clearly, they don’t see much opportunity in this sector.

Coming to infrastructure, on account of the Government’s focus towards infrastructure development (which can help India clock better GDP growth), allocation to the engineering and construction companies has increased. A couple of opportunities fund today have a total exposure in excess of 20% to infrastructure as a theme, and most others in the category have an exposure of 10%-15% to these sectors.

How Opportunities Funds fared on returns?

Rolling return performance versus benchmark
Data as on May 26, 2017
Returns are on a rolling basis and those depicted over 1-Yr are compounded annualised
(Source: ACEMF, PersonalFN Research)

Based on our broad analysis, opportunity funds, by being dynamically managed, have been able to generate a decent alpha. This means, they’ve outperformed the benchmark index by a respectable margin, while not all funds have been aggressive in chasing alpha.

The performance of an opportunities fund is mainly dependent on the fund manager’s ability to identify rewarding opportunities. Investment opportunities may present themselves in the form of individual stocks as well. Certain stock bets have been paid off, while others led to a lag in performance. Fund managers who have been adept enough to identify winning opportunities early reported an enhanced performance.

So, a fund manager not only needs to have sound knowledge and understanding of how businesses within each sector/theme, but also needs to have a good judgement of how changes in policies and the like will affect these businesses or sectors/theme. This skill develops with years of experience. Only a few might be successful. And at times, the market can prove even ace fund managers wrong.

Hence, when picking an opportunity fund, it is essential to rate how the fund has performed over multiple periods and market phases. Due to the risk associated with this style of investing, only a few funds have been able to deliver superior risk adjusted returns.

Who should go opt for opportunities style fund?

If you wish to seek that extra return and do not mind the short-term volatility, then opportunity funds are for you. At the same time, it is vital to check that the fund follows a sound investment process and risk management systems.

PersonalFN’s FundSelect service helps you zero-in on the top-performing funds across varying market caps and investment style. Be it large cap, midcap, multi cap, value-based, opportunities-styled or balanced funds, along with our top recommendations we highlight the underperforming or average performing ones too.

With over 15 years’ experience in fund research, PersonalFN has established a methodology to select funds that beat the market by a whopping 70%! Don’t miss this opportunity— Subscribe to the unbiased, research-backed service here.

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