- Wealth PMS
Invesco has launched an NFO (New Fund Offering) for a Focused Multi-Cap Equity Mutual Fund. The NFO is open from 9th to 23rd September 2020. We took a look to see if it makes sense for investors.
Short Answer: Unlike Large Cap funds that produce similar returns and underperform low-cost ETFs, Multicap & Focused funds see significant performance dispersion. So it matters which fund you pick. Unless you have reason to believe the fund managers of this new fund bring a unique advantage to the table, you are better off with funds with a track record.
Read on for our take on “Non-Focused” versus “Focused” Multicap Funds and how to pick one.
The Invesco India Focused 20 Equity Fund NFO document in a nutshell:
Investment Objective: To generate capital appreciation by investing in up to 20 stocks across market capitalisation.
Benchmark: S&P BSE 500 TRI
Stock Selection Process (summarised):
“Direct and in-depth interaction with a company and its competitors, suppliers, and buyers-wherever feasible and possible” to develop unique insight into the company.
Categorize stocks into proprietary stock categorization system:
To evaluate any mutual fund, especially a new fund offering, it’s important to first zoom out. To look at how existing funds in the category have done in the past relative to the benchmark, and the extent of dispersion in results. For example, if 50 existing funds in a category have largely similar benchmark-hugging results, then you have to wonder what scope there is for the 51st fund to offer materially better performance.
Focused funds are a type of MultiCap funds. They can own any stocks across market capitalisation depending on their strategy. But they can only hold up to 30 stocks. There are 17 Focused Funds as of this writing, of which 15 have been around more than 1 year.
But for most multicap funds, since the top 30 holdings for most equity funds account for the bulk of assets under management, it is more a marketing distinction than a distinct investment philosophy.
Chart compares annualised performance of Multicap Equity Funds over the last 1, 3, and 5 years.
Two things stand out from this chart:
There is significant dispersion in performance between the best, median, and worst funds. Choice of fund matters.
Overall a slightly longer term, median funds have not outperformed the NIFTY Total Returns Index. The longer the period, the harder it is for the actively managed fund to beat a passive buy and hold strategy. Not just for retail investors, even for professional asset managers, picking stocks that consistently beat the benchmark is hard. [read: How to think about stock picking in India]
Chart compares performance of the best to worst Focused funds with their Non-focused multicap counterparts.
Interestingly, over five years, the Non-Focused Multicap fund with the best record (Parag Parikh Long Term Equity) beats the corresponding Focused fund (IIFL Focused Equity Fund). Further down though, Focused funds beat their Non-focussed counterparts.
But we don’t necessarily have a clear takeaway because there are 31 Non-Focused funds, but only 10 Focused funds.
Here’s the list of MultiCap Funds including Focused funds in descending order of their annualised five year returns.
The Focused funds are interspersed in the list and their 1, 3 and 5 year performance and their expense ratios don’t suggest they are very different from non-focused multicap funds.
Another way to look at relative performance is to take median returns of the last five years (as opposed to annualising cumulative return over the same period) and plot it against the variability in that return.
The bubble sizes represent AUM (as of two months ago), the x-axis represents median of last five year returns taken individually, and the y-axis is the variability in annual returns. The strong performers are on the bottom right while the weak performers are on the top left of the chart.
The strong performers are Parag Parikh Long Term Equity, Kotak Standard Multicap, SBI Magnum Multicap, and Aditya Birla Sun Life Equity.
Multicap and Focused funds offer a broad mandate for the fund manager to invest in whatever they have conviction in. This enables some funds to set themselves apart by picking portfolios that beat benchmarks handily. But the broad mandate cuts the other way for new funds. It’s hard enough to forecast company financial performance. It’s even harder to forecast the performance of a portfolio that does not exist yet.
Yes, there is a process of how the fund will pick stocks. And on that count, Invesco’s Focused fund process is detailed. But if you relook at the table at the beginning of this article, it basically enables picking any stock under the sun and it will logically fit into at least one of the 7 categories listed.
As far as ‘Focused’ strategies go, with 20 stocks, this fund will likely have one of the more concentrated mutual fund portfolios you are likely to see. Which could be a good and a bad thing.
Invesco already has a Multicap Fund. It is in the middle of the pack in terms of five-year performance, which is probably a reason to launch a Focused fund. The existing funds 25 holdings make up only about 70% of its assets, so the Focused fund will be materially different.
Until the new fund shows a history of portfolio entries and exits, investors are better off picking one of the funds with five or atleast three year track records. Especially those that appear in the ‘Strong’ performer quadrant in the chart above.
Other recent Mutual Fund NFO we wrote about:
HSBC Focused Equity Fund [link]
Nippon India Multi Asset Fund [link]
Motilal Oswal Multi Asset Fund [link]
Mirae Asset Arbitrage Fund [link]
Motilal Oswal S&P500 Index Fund [link]
Which Tax-Saving ELSS Fund should I invest in? [link]
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