Fund Call. Kotak Opportunities: Smart recovery over the last five years - Buy

With the markets touching new highs, investors unwilling to take high risks can bet on Kotak Opportunites. Though funds with an ‘Opportunities’ tag are typically multi-cap funds roving across market capitalisations for the best bets, Kotak Opportunites retains a large-cap bias.

While it did not put up a great show in the 2012 rally, the fund has done well across market conditions since then. A change in strategy probably due to the taking over of the fund management by Harsha Upadhyaya in August 2012 has helped. In the last five years, the fund has consistently outperformed its benchmark, Nifty 500, and peers such as Franklin Opportunities, Reliance Equity Opportunities, Tata Equity Opportunities and UTI Opportunities.

Across bull, bear and iffy phases of the market, Kotak Opportunities invests only 5-15 per cent of its portfolio in mid- and small-cap stocks (those with market capitalisation below ₹10,000 crore). This approach hurt the fund a bit in the mid-cap-led rally in 2012, when the fund slightly underperformed its benchmark.

Continuing to be in defensive mode after the 2011 market fall, with higher cash/debt and showing a preference for consumer-non durables in this period also marred its performance. But the fund made up for this during the more broad-based upswing in 2014 by latching on to the rally early enough.

While it held 90-92 per cent in equities until August 2013, it swiftly increased it to 98 per cent by October 2013. The fund also benefited in this period by loading up on cyclical sectors such as automobiles and auto ancillaries. Considering that markets have rallied well so far in 2017, the fund is playing safe now and has brought down equity exposures in the last few months.

Over one-, three- and five-year periods, the fund has returned 5-7 percentage points higher than the benchmark. It also scores high on consistency in beating the benchmark.

On a one-year rolling return basis, the fund has outperformed the Nifty 500, 95 per cent of the time in the last five years. This implies that an investment in the fund at any point in time in the last five years had a 95 per cent chance of generating benchmark-beating returns.

Banks have always been the top sector across market cycles. The fund currently holds 18.5 per cent of its portfolio in banking stocks. It has preferred private banks such as HDFC Bank, ICICI Bank, IndusInd Bank and Axis Bank in this space.

While exposure to the auto sector was brought down during the 2015 and 2016 volatility, it has moved up once again in recent times.

Given the good prospects for rural demand, Hero MotoCorp and Mahindra & Mahindra, which have a rural bias to their clientele, are part of the portfolio. At the same time, considering the high valuations, the fund has been gradually booking profits in the Maruti Suzuki stock.

The headwinds in the IT space have seen the fund cut exposure to software stocks in the last one year. Infosys and Persistent Systems are the only stocks which it holds now in this segment.

Some of the good mid-caps in its portfolio include SKF India, FAG Bearings and MCX.

The fund is overweight on sectors such as energy, engineering and construction with respect to the benchmark, indicating that it is currently betting on industrial recovery.

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