What is Driving Kotak Standard Multicap Funds Extra-Ordinary Performance   Aug 09, 2018


The erstwhile Kotak Select Focus Fund has been converted into a multicap fund and is now known as Kotak Standard Multicap Fund. The fund’s extra-ordinary performance has seen it in a limelight for quite some time.

With a market-beating performance, the fund has caught the investors’ fancy, pushing it to the list of Top 5 largest diversified equity funds. In the last two years, the fund has seen a four-fold increase in size. And currently it has a corpus of about Rs 20,000 crore under its management, which nearly raises concern about its capacity.

However, the large cap orientation of the fund still offers it some flexibility to accept more investors. Notably, Kotak Standard Multicap Fund has now become the flagship fund of Kotak Mutual Fund, while the second largest scheme in its stable – Kotak Emerging Equity Scheme has a corpus of just around Rs 3,200 crore, followed by Kotak Equity Opportunities Fund at Rs 2,500 crore. It will be interesting to see, if Kotak Standard Multicap Fund can sustain its extra-ordinary performance or will the huge size play a spoil sport for its investors.  

With an objective of generating long-term capital appreciation from a portfolio of predominantly equity & equity related securities, Kotak Standard Multicap Fund generally focuses on a few selected sectors with its portfolio being diversified across market capitalization. The new mandate adopted by the fund offers it the complete flexibility to stick to its original mandate of focusing on selected sectors as well as diversifying the portfolio across market caps, without any restriction.

Historically, the fund has held a large cap bias portfolio that has been in the range of 70% to 85% of its assets, and it is expected to continue with similar allocation in future as well. Although classified as a multicap fund, the large cap bias followed by Kotak Standard Multicap Fund is contrary to its classification and far from calling it a true to its style multicap fund.

Fund Facts – Kotak Standard Multicap Fund

Category Multi Cap Fund Style Blend
Type Open ended scheme Market Cap Bias Multi Cap Fund
Launch Date 17-Sep-2009 SI Return (CAGR) 15.02%
Corpus (Cr) Rs 19,827 Min./Add. Inv. Rs 5,000 / Rs 1,000
Expense Ratio (Dir/Reg) 1.17% / 2.14% Exit Load 1%
Portfolio Data as on June 30, 2018.
SI Return as on July 31, 2018.
(Source: ACE MF)

Growth Of Rs 10,000, If Invested In Kotak Standard Multicap Fund 5 Years Ago

Data as on August 07, 2018
(Source: ACE MF)

Generating returns at about 25% CAGR, Kotak Standard Multicap Fund has shown stellar performance over the last 5 years. It has outperformed the benchmark Nifty 200 – TRI index by about 6 percentage points. An investment of Rs 10,000 in Kotak Standard Multicap Fund 5 years back, would now have more than tripled and appreciated to Rs 30,225. A simultaneous investment in the benchmark Nifty 200 – TRI index would have grown to Rs 23,699. Outperforming many of its peers in the multicap funds category, Kotak Standard Multicap Fund has graduated to the list of top quartile performers.

Kotak Standard Multicap Fund: Year-on-Year Performance

Year-on-Year Performance
*YTD as on August 07, 2018
^ SI as on September 11, 2009
(Source: ACE MF)

Launched with a focused strategy in mind way back in September 2009, when the markets were recovering from the 2008 sub-prime crisis, Kotak Standard Multicap Fund now has a track record of around 9 years. During this period the fund has registered fair level of consistency and outperformance over the benchmark. More importantly it has proven the ability to steer pass the choppy market conditions. The fund has outperformed the benchmark in 7 out of the 10 calendar years of its existence. Overall, Kotak Standard Multicap Fund carries a superior long term performance track record, while its returns have gradually bettered some established funds in its category.

Kotak Standard Multicap Fund: Performance Vis-à-vis Category Peers

Scheme Name Corpus
(Rs Cr)
1 Year (%) 2 Year (%) 3 Year (%) 5 Year (%) Std Dev Sharpe
Motilal Oswal Multicap 35 Fund 13,016 24.43 24.65 20.33 -- 14.34 0.14
SBI Magnum Multicap Fund    5,413 21.04 20.59 16.24 22.22 13.16 0.13
Principal Multi Cap Growth Fund       661 26.22 25.27 16.20 22.32 16.63 0.12
Aditya Birla SL Equity Fund    9,351 18.82 23.19 16.16 23.27 13.67 0.13
Invesco India Multicap Fund       524 23.45 21.31 15.68 26.32 15.28 0.10
Kotak Standard Multicap Fund 19,827 19.70 21.36 15.54 22.19 12.79 0.15
Mirae Asset India Equity Fund    7,945 22.10 21.79 15.10 22.06 13.41 0.14
BNP Paribas Multi Cap Fund       854 22.57 20.20 14.45 20.48 14.40 0.06
Parag Parikh Long Term Equity Fund    1,107 21.25 17.91 13.97 20.17 10.09 0.19
Edelweiss Multi-Cap Fund         87 25.81 21.38 13.42 -- 14.95 0.11
ICICI Pru Multicap Fund    2,753 14.76 17.90 13.03 19.78 12.37 0.11
Franklin India Equity Fund 11,470 16.33 16.05 12.58 20.11 11.78 0.07
DSPBR Equity Fund    2,503 19.56 19.94 12.41 18.78 15.16 0.08
HSBC Multi Cap Equity Fund       637 19.29 19.54 12.21 20.45 14.88 0.08
IDFC Multi Cap Fund    5,484 18.65 15.61 11.76 20.89 13.71 0.04
L&T Equity Fund    2,798 18.94 17.96 11.37 18.60 13.44 0.07
IDBI Diversified Equity Fund       363 17.95 14.51 11.30 -- 12.24 0.04
HDFC Equity Fund 21,754 18.61 20.05 10.81 18.20 16.73 0.06
Baroda Pioneer Multi Cap Fund       673 17.13 16.71 10.21 16.31 13.57 0.03
UTI Equity Fund    7,986 18.26 15.27 10.18 17.48 12.52 0.11
Canara Rob Equity Diver Fund       913 21.21 17.66 10.09 15.87 14.44 0.06
Reliance Multi Cap Fund    9,732 19.79 15.10 9.00 18.15 15.00 0.00
Taurus Starshare (Multi Cap) Fund       210 15.40 15.17 8.58 14.52 14.67 -0.01
Union Equity Fund       212 14.60 13.93 6.32 12.92 13.09 0.01
LIC MF Multi Cap Fund       275 10.85 11.11 4.63 11.96 15.50 -0.04
NIFTY 200 - TRI 19.95 18.41 10.98 15.77 13.11 0.10
Returns are on a rolling basis and those depicted over 1-Yr are compounded annualised.
Data as on August 07, 2018
(Source: ACE MF)

*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

The top quartile performance showcased by Kotak Standard Multicap Fund (erstwhile Kotak Select Focus Fund) has attracted many investors, pushing its AUM towards the Rs 20,000 crore mark. Notably the funds corpus has increased almost four folds in the last 2 years, from around Rs 5,000 crore in June 2016 to around Rs 20,000 crore at present. The fund has consistently outperformed its benchmark, the Nifty 200 – TRI index, over longer time periods of three-years and five-years, to the extent of 5-6 percentage points. In these timeframes, the fund has also fared better than many of its popular category peers.

Kotak Standard Multicap Fund has shown fair level of stability. Its standard deviation of 12.79% signifies that the funds volatility has been lower than the benchmark (13.11%), while its Risk Adjusted Return (Sharpe Ratio) of 0.15 is one of the highest in the category, and much ahead of its benchmark. The funds superior risk management strategies and ability to timely switch its focus to defensives has helped it tide uncertain market phases well.  

Investment Strategy of Kotak Standard Multicap Fund

Launched with a mandate to follow focused investment strategy, Kotak Select Focus Fund has been renamed as Kotak Standard Multicap Fund and classified under multi-cap funds category. The newly defined multi-cap mandate still allows the fund to continue with its strategy of focusing on selected sectors, while holding exposure across market caps with a large cap bias.

Kotak Standard Multicap Fund follows a combination of top down and bottom up approach to stock picking. It focuses on select sectors that the fund manager believes will perform better in the economy, and applies bottom up approach to pick stocks within selected sectors. The funds core portfolio comprises of 5-6 sectors together totaling to around 60-70% of its assets. Even though it follows a focused approach towards few selected sectors, it tries to ensure that the top 10 stocks does not breach the 40% mark.

Kotak Standard Multicap Fund - Portfolio Allocation and Market Capitalisation Trends

Portfolio Allocation
Holdings (in %) as on June 30, 2018
(Source: ACEMF)

Despite following a multicap strategy, the funds portfolio has remained biased towards large caps, that account for atleast 70% of its assets. Over the past year or so, the market cap allocation in the funds portfolio has remained almost steady. The exposure to large-caps has remained around 75% to 80% of its assets, while mid and small caps have well been below the 20% mark. Although the fund has been classfied as multi-cap fund, it cannot be termed as a true to its style multicap fund. Over the last 6-8 months the fund has remained heavy weight on large caps, compared to a typical multicap fund.

Kotak Standard Multicap Fund – Top Portfolio Holdings

Top 10 Stocks

Stocks % of Assets
HDFC Bank Ltd. 7.66
Reliance Industries Ltd. 4.90
Larsen & Toubro Ltd. 4.89
HDFC Ltd. 4.72
Infosys Ltd. 4.28
ICICI Bank Ltd. 3.47
Hero MotoCorp Ltd. 2.89
RBL Bank Ltd. 2.79
State Bank Of India 2.68
Maruti Suzuki India Ltd. 2.67

Top 5 Sectors

Top 5 Sectors
Holdings (in %) as on June 30, 2018 (Source: ACEMF)

Kotak Standard Multicap Fund holds a well-diversified portfolio of around 50 to 60 stocks. As on June 30, 2018, the fund held 57 stocks in its portfolio, with top 10 stocks together accounting to about 41% of its assets. Typical large cap names like HDFC Bank, Reliance Industries, L&T, HDFC Ltd., Infosys, ICICI Bank etc. have been among the core holdings in the fund’s portfolio. While creating the portfolio, the fund manager limits his picks to not more than 5-6 stocks from a single industry. He also makes active use of derivatives to take position in few stocks at a discount.

Around one-third of the fund’s portfolio is allocated to stocks in the Banking and Financial sector, followed by Auto, Consumption and Engineering. The top 5 sectors together account for around 58% of its assets. I.T., Cement, Petroleum and Oil & Gas are among the other core sectors in the fund’s portfolio with an allocation of about 5-6% each. While the fund remains heavyweight on cyclicals to ride the market boom and rallies, it also makes well use of defensives during extreme market conditions.

Major Gainers: Stocks like Avenue Supermarts, Bajaj Finance and Bata India have contributed to the fund’s outperformance in the last one year, gaining over 60-80%. Other stocks in the funds portfolio like Bajaj Finserv, Reliance Industries, Infosys, Solar Industries, Whirlpool India, Ashok Leyland and IndusInd Bank have appreciated over 30% in value, in a year's time.

Major Losers: Among the list of losers, the fund held Kirloskar Oil Engines, Techno Electric & Engineering Co., Cadila Healthcare, The Federal Bank and Bharat Electronics, that lost about 25-35% in value. Nevertheless, the exposures to these stocks have been less than 2% of its assets.

Suitability of Kotak Standard Multicap Fund

Multi cap funds should ideally offer the benefit of diversification across market caps. In the absence of any limit on market cap segment, Kotak Standard Multicap Fund can easily continue with its large cap orientation. However, the new classification offers it the flexibility to switch its allocation across market caps, without any limit or restriction.

The extra-ordinary performance of the fund has been driven by its smart sector and stock selection strategy. However, its heavyweight position towards few selected sectors may even result in short term underperformance, if any of its core sectors remains temporarily out of favour. While it is quite easier to switch sector focus with a small size, the larger size of the fund may become a hurdle in switching focus instantly across sectors. Although the fund has shown extra-ordinary performance in the past, investors need to keep a realistic return expectation from the fund.

While Kotak Standard Multicap Fund has turned out to be a rewarding proposition for investors, it is necessary to understand your risk appetite while investing in equity mutual funds and have a decent time horizon in mind. Selecting best mutual funds is not everyone's cup of tea. It needs a sheer focus and much detailed analysis across both quantitative and qualitative parameters.

PersonalFN's SMART score matrix has been designed to evaluate mutual funds on host of such quantitative as well as qualitative parameters.

The SMART Score Matrix
S Systems and Processes
M Market Cycle Performance
A Asset Management Style
R Risk-Reward Ratios
T Performance Track Record

All the parameters listed above are crucial to test and identify solid mutual funds that have the potential to reward investors in the long run. Using this 5 point evaluation matrix, PersonalFN has successfully guided investors in selecting right mutual funds with a solid growth potential.

Note: This write up is for information purpose and not a recommendation to buy or sell the mutual fund scheme. 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 financial planner or investment advisor.

Author:Vivek Chaurasia


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