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: An equity fund that can invest across market capitalisations

Why: Does not get aggressive in market cap allocations and has a differentiated strategy of picking a few sectors and focusing on them

Whom: Moderate and high-risk investors with a 5-year timeframe

At 12.8%, the 1-year returns of Kotak Standard Multicap may not look inspiring against the 17.8% of the Nifty 200 TRI, its benchmark index. Why then is it still a good bet despite this lag?

It has to do with both the nature of the market currently and the fund’s own strategy. Kotak Standard Multicap (Kotak Multicap) identifies a few sectors that can grow well and concentrates on those. The fund also tends towards a value-based approach.

Market indices at this time are skewed with only a few stocks contributing to its rise and the rest flat or declining. This makes it hard to beat the index, since it is natural to hold stocks outside the few outperformers. Hence, we are not too concerned about the fund underperforming the index in the past year. What we are sanguine about is that Kotak Multicap’s current stock picks hold growth potential over the longer term. A combination of quality stocks from sectors that can pick up with the economy in the long term along with select picks from FMCG and IT to lend support in the near term will likely help the fund stablise itself.

Recent performance and portfolio

Kotak Multicap’s underperformance started only towards the end of 2017, when markets were euphoric without a strong underlying fundamental reason.

In its portfolio, Kotak Multicap has been lifting weights to financials in the past year. It has opted for stocks outside of banks; the fund has in fact marginally dropped weight to banks. In IndusInd Bank, for example, the fund booked some profits. It exited Federal Bank. Instead, the fund added to insurance companies and NBFCs such as HDFC Standard Life, ICICI Lombard General Insurance, Bajaj Finance, and so on. This holds potential because, for one, financial stocks outside of banks are a play on the growing finance sector and do not have to deal with the stresses that banks currently face. Further, these stocks are also a play on the consumption theme and can thus hold up well. The fund also still holds evergreen retail bank stocks such as HDFC Bank.

Kotak Multicap’s other sector weights tend towards the cyclical side. Even here, the fund has stuck to quality stocks that can grow or are already showing good market performance. For example, in energy where it is overweight compared to the index, it holds outperformer Reliance Industries as well as the more beaten down Petronet LNG. It moved out of severe underperformer HPCL, which faces the fallout of rising crude oil prices.

Similarly, the fund has picked up steel stocks which are seeing a growth recovery, infrastructure player Larsen & Toubro, capital goods & engineering companies such as Bharat Electronics and AIA Engineering. These sectors can pick up later as the rally gets more broad-based and stocks reflect economic growth.

What can also shore up returns in the near term is the fund’s select consumer and IT picks. While the fund is still underweight on these sectors and has also only just added to IT, stocks can still support returns as the market rewards defensives and stocks with earnings visibility. For example, the fund holds – and has slightly lifted weights to – strong performers such as Britannia, Bata India, Godrej Consumer Products, and Hindustan Unilever.

Kotak Multicap’s returns have been picking up in recent times, going by very short-term returns where the fund has moved above the Nifty 500 TRI and is on par with the Nifty 200 TRI. The Nifty 200 TRI is the fund’s actual benchmark while the Nifty 500 TRI is a broader benchmark for multicap funds. The margin by which 1-year returns of Kotak Multicap trails the Nifty 200 TRI and Nifty 500 TRI is also narrowing.

In the longer 3-year and 5-year period, Kotak Multicap holds well above the two indices. The fund also remains above peer average, considering all funds that can invest across market capitalisations (i.e., including large & midcap, value categories etc.).

Suitability

Kotak Multicap, though having the flexibility to move across market capitalisations, maintains a large-cap bias to its portfolio. Large-caps have held around 70-75% over the past few years with the rest in mid-caps and small-caps. The measured mid-cap exposure can help the fund deliver higher returns than pure large-cap funds without taking excessive risk.

Over the long term, the fund is able to beat the Nifty 200 TRI and the Nifty 500 TRI all the time on a rolling 3-year return for 5 years. The average of this outperformance is high at around 5 percentage points. The average 1-year outperformance margin over a 3-year period is similarly high at around 4 percentage points. The fund contains downsides well and is above average on this metric compared to peers, using the capture and Sortino ratios. The fund is also above average on risk-adjusted returns.

Kotak Multicap suits moderate and high-risk investors with a long-term perspective. The fund is also good for investors’ core portfolios. The fund has an AUM of Rs 21,271 crore. It is managed by Harsha Upadhyaya.

FundsIndia’s Research team has, to the best of its ability, taken into account various factors – both quantitative measures and qualitative assessments, in an unbiased manner, while choosing the fund(s) mentioned above. However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts’ expectations about future events.

This article was first published on FundsIndia.com and can be accessed here.