DSP Black Rock Focus 25: A good focused equity fund for long term investments

There are now quite a few equity mutual funds in the market with Funds with concentrated or focused portfolios, some of which have been doing quite well also. Some investors may ask whether the fund manager can achieve the desired level of unsystematic risk diversification in such focused funds. Funds with concentrated portfolios aim to generate higher alphas or outperformance versus the benchmark index, through stock picking abilities of their fund managers with optimal risk diversification. Typically, these funds tend to be more volatile relative to more diversified funds. However, over the long term in a secular bull market, these funds have the potential to give superior returns. If we look at the performance of some the focused funds over the past three years we can see that these funds have given good trailing annualized returns, as shown in the table below (NAVs on Dec 15, 2015)

Source: Advisorkhoj Research

The DSP BlackRock Focus 25 fund, a large cap oriented diversified equity fund, has been a good performer on a relative basis, even in the last one year, when market conditions have been quite difficult. While last one year is not a suitable timeframe, if we look at the 1 year returns in conjunction with other performance parameters we will see that, the fund has the potential to give strong long term returns once, we are past this stage of volatility.

The DSP BlackRock Focus 25 Fund was launched in June 2010 and has an AUM base of र 1,076 crores. Over last few months the AUM has grown multiple times. In the initial years of the fund, the performance of the fund was relatively modest, which is not unexpected due to its focused investment strategy. However, the fund delivered outstanding returns in 2014 and is continuing to deliver outperformance in 2015. The chart below shows the annual returns of the fund from 2011 to 2015 (year to date) relative to the large cap funds category.

Source: Advisorkhoj Research

Rolling returns is the best measure of a fund’s performance in terms of consistency. The chart below shows the 3 year rolling returns of the fund over the last 5 years. Rolling returns are the absolute returns of the scheme taken for a specified period on every day/week/month and taken till the last day of the duration. We have chosen 3 years as the rolling returns time period because it is always recommended that long term investors should hold equity funds for at least 3 years. In this chart we are showing returns on every day during the specified period and comparing it with the benchmark. The orange line shows the 3 year rolling returns of DSP BlackRock Focus 25 fund (Growth Option) and the black line shows the 3 year rolling returns of the benchmark BSE 200.

Source: Advisorkhoj Research

We can see that DSP BlackRock Focus 25 fund has been consistently outperforming the benchmark index since 2012.

Till the end of 2014, the DSP BlackRock Focus 25 fund was managed by veteran fund manager Apoorv Shah. Now the fund is managed by Harish Zaveri and Jay Kothari. The fund managers have made concentrated bets in high conviction stocks. From a market capitalization perspective, the fund portfolio has a large cap bias with around 90% of the fund portfolio invested in large cap stocks. Over the past one year, midcap funds have given higher returns than large funds because large cap stocks have been more severely impacted by the FII outflows over the last several months. However, as per many market experts, small and midcap stocks have run up quite a lot and the valuation gap with large cap stocks do not exist now. As per an Economic Times report, two years back the average Price Earnings ratio (P/E) of large cap stocks was around 15 while that of midcap stocks was around 10, whereas now on average large cap stocks are trading at slightly lower valuations than midcap stocks. Experts believe that this anomaly is likely to get corrected, once FII inflows resumes and therefore large cap funds are likely to give very strong returns in the moderate term. In terms of sectoral allocation of the portfolio, the portfolio is strongly oriented to cyclical sectors like Banking and, Automobiles and Auto Ancillaries, Cement and Construction, Oil and Gas, Capital Goods etc. As the capex cycle picks up in the economy the portfolio is expected to deliver stronger returns. From a company concentration standpoint, the top 5 holdings, Maruti Suzuki, HDFC Bank, Indusind Bank, State Bank of India and Tata Motors comprise around 38% of the fund’s portfolio. The top 10 holdings comprise 56% of the fund’s portfolio value.

Source: Advisorkhoj Research

One of the questions that investors have regarding focused funds is, whether these funds are really diversified funds or if they fall within the gamut of sector funds. While it is true that, given its concentrated portfolio holdings, the DSP BlackRock Focus 25 Fund is less diversified than other funds in the diversified equity category, it cannot be classified as a sector fund because the sectoral allocation of the fund covers a wide range of sectors. Though banking and finance constitutes a significant portion of the portfolio holding, the fund has significant allocations to other sectors.

Risk and Return

In terms of risk measures, the volatility of the DSP BlackRock Focus 25 Fund is on the higher side, relative to the average volatility of large fund oriented diversified equity funds. This is consistent with the concentrated portfolio holding of this fund. Investors need to have a long investment horizon to get maximum return from this fund. Further since focused funds tend to be more volatile than more diversified funds, investment through Systematic Investment Plan (SIP) is the ideal mode of investing for such funds, since the investor can take advantage of the volatility in NAVs.

Strong SIP returns of DSP BlackRock Focus 25 Fund

The chart below shows the returns since inception of र 3,000 invested monthly through SIP in the DSP BlackRock Focus 25 Fund (growth option). The SIP date has been assumed to first working day of the month. The chart below shows the SIP returns of the fund.

Source: Advisorkhoj Research

The chart above shows that a monthly SIP of र 3,000 started at inception of the DSP BlackRock Focus 25 Fund (growth option) would have grown to nearly र 3 lacs by April 7 2015, while the investor would have invested in total about र 2 lacs. The SIP return (as measured by XIRR) since inception of the fund is nearly 21%.

Conclusion

DSP BlackRock Focus 25 Fund is has completed 5 years in June. Though the performance of the fund was relatively modest in the first 2 – 3 years, the fund manager’s conviction paid off in 2014 and the fund has delivered strong outperformance in difficult market conditions. The fund is ideal for investors looking for capital appreciation over a long time horizon for a variety of financial objectives. As discussed earlier, given the concentrated portfolio of this fund, investors in this fund should be prepared for volatility. However, if they are invested over a long time horizon, investors can expect good returns. Investors should consult with their financial advisors if DSP BlackRock Focus 25 Fund is suitable for their investment portfolios.