IDFC Equity Opportunity Series 2: Betting on slow recovery

The markets in the last six months have rallied mainly on the hope that India will soon get back to 8 per cent growth. That’s why many new funds have chosen to play a turnaround theme, looking for ‘value’ picks among beaten-down stocks or sectors.

These range from out-of-favour public sector banks to those in the construction/infrastructure/capital goods space, to even those mid-and small-caps that took a knock in 2013 after their dream run the year before.

But what if the recovery takes more time than anticipated? That’s the view that IDFC Mutual Fund is taking with its new Equity Opportunity Series.

slow progress The second scheme in this series is now open for investments. This scheme looks to help investors make gains based on the premise that the economy will make slow progress towards recovery, instead of following a V-shaped path.

The fund house holds the view that with many uncertainties hovering over growth, Indian companies will not rush into capacity expansion projects anytime soon.

Thus, the profit growth that comes from higher capacities will not flow in over the next year or two.

Instead, the companies best placed to benefit from the gradual recovery over the next year or two would be those who can derive higher profits from their existing resources and assets.

Higher demand would lead to higher volumes for such companies, with every additional sale contributing less towards fixed costs and more towards profitability. Hence, earnings for these companies could grow at a higher rate than revenues.

The fund targets companies that can utilise existing capacities better without spending on expansion, those which can improve profit margins by recovering a higher portion of fixed costs and those which can grow profits through better product mix.

Though such opportunities are visible in sectors such as cement and steel, the universe of stocks for the fund will not be restricted to manufacturing industries alone. Even service sectors such as software, where some companies have significant staff on the bench, may be able to capitalise on this theme.

Besides, sectors/companies which offer scope for consolidation whereby synergies from shared resources could shore up profitability will also be considered.

With the BSE 500 as its benchmark, the Series 2 will look for such stocks across market capitalisations and seeks to have a flexi-cap mandate.

To give the fund the flexibility to take concentrated bets and hold on to stocks until the theme plays out, it will remain closed ended for three years.

Pros & Cons The fund’s performance is predicated wholly on IDFC’s macro idea playing out – that there will be a gradual economic recovery and not a V-shaped one.

The very specific mandate restricts the investment universe available to the fund. But this is mitigated by the fact that this is a closed-end fund, which may not be troubled by inflows and outflows during its tenure.

The closed end nature prevents investors from exiting the fund if performance falters. Liquidity will be constrained, but the fund hopes to offer dividend payouts to compensate.

Running a fund of this nature requires exceptional stock selection skills. But IDFC Mutual Fund has proved to be an impressive manager of equity money, with a good record across large-, mid- and small-cap stocks.

Punam Sharma is the fund manager.

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