Motilal Oswal Focused 25 Fund: Holding its own in volatile markets

The market has been scaling new peaks despite the economy being not yet out of the woods and many companies still facing growth challenges. Positives, real or perceived, are being lapped up while negatives seem to be ignored.

For those seeking to play it relatively safe at this juncture, well-run large-cap-oriented funds may be a better bet.

Large-cap funds with a dominance of big stocks in their portfolio are generally less volatile among the equity fund categories, and can contain downsides better. Also, large-cap funds could participate meaningfully in upsides, even if not to the extent of riskier categories such as mid-caps and small-caps in raging bull markets.

Good show

Motilal Oswal Focused 25, a large-cap-oriented, focussed fund, is a good choice in the large-cap category.

The scheme, launched in May 2013, is a top quartile performer — doing relatively better both during market downsides and upsides.

For instance, during the market crash in February and March this year, the fund lost lesser than the large-cap category average, and it also rallied more during the subsequent rally.

This, coupled with a strong performance in 2019, has translated into the fund delivering a return of 13.4 per cent over the past year, higher than the 10 per cent return of its benchmark (Nifty 50 TRI) and the large-cap category average (about 8 per cent).

Over longer periods, too, the fund has done well.

Though it struggled in 2018 and has marginally underperformed the benchmark over three and five years (by about 0.5 percentage points annualised), the fund has outperformed since it inception about 7.5 years ago with an annualised return of about 14 per cent compared with the benchmark return of about 12 per cent.

Also, on a one-year rolling return basis, the fund’s annualised return since inception is about 3 percentage points higher than the benchmark’s. Among focussed funds, too, the scheme has done better than most peers.

Focussed on large-caps

The fund’s investment approach — a focussed portfolio comprising a maximum of 25 stocks, mostly large-cap, high-quality ones — has worked for it.

As of October 31, the fund had 23 stocks in its portfolio and almost 87 per cent of the fund’s corpus is in large-caps.

In general, the scheme’s allocation to large-caps (80-plus per cent) is higher than its mandate of minimum 65 per cent.

The sprinkling of smaller stocks (about 12 per cent now) is mostly allocated to mid-caps and could provide a kicker to returns.

Being categorised a focussed fund (with minimum 65 per cent allocation to large-caps and up to 35 per cent to smaller stocks) gives the scheme higher flexibility in portfolio construction than it would have had if it was categorised a large-cap fund (minimum 80 per cent allocation to large-caps and up to 20 per cent to smaller stocks).

The focussed max-25 stock portfolio, the fund believes, provides adequate diversification to optimise risk and returns. It adopts a bottoms-up stock-picking approach of high-conviction stocks, with a buy-and-hold strategy. Also, its remains almost entirely invested in equities across market conditions, except during extreme market volatility such as in March 2020, when the allocation to cash and debt was increased to about 6 per cent.

The fund deviates significantly from the benchmark composition to generate alpha (excess return). The concentration risk that could arise from a relatively small number of stocks in the portfolio is mitigated by the focus on bluechips. For instance, in the latest portfolio, HDFC Bank and HDFC account for 9-10 per cent each of the corpus, while Kotak Mahindra Bank and TCS account for 7.5-8 per cent each.

Portfolio shifts, composition

Amidst the highly volatile market conditions this year, Motilal Oswal Focused 25, for the first time, bought stake in Reliance Industries in May and upped it to 9 per cent of the corpus, before paring it to about 6 per cent in October. Other notable changes since March include stake buy in Infosys (about 6 per cent of corpus now) and the near-doubling of stake in HDFC (about 9 per cent now). Banks and finance stocks remain the largest sector holdings (almost 40 per cent) in the portfolio. Over the past year, the fund has upped its holdings in refineries, and the defensive IT and pharma sectors.