Kotak Select Focus : A good diversified equity fund for strong risk adjusted returns

The Kotak Select Focus fund has delivered superior returns compared to the category of diversified equity funds and the S&P BSE 100 index, over the last one, two and three years’ time periods. The fund adopts an active, focused sector concentration approach to outperform the market. The chart below shows the annualized trailing returns of the Kotak Select Focus fund growth option, regular plan, over the last 1, 2 and 3 year time periods, compared to the diversified equity funds category and the S&P BSE 100 index. NAVs as on June 8 2014.

Fund Overview

The Kotak Select Focus fund was launched in September 2009 and has done quite well since then. The fund has over Rs 350 crores of average assets under managementfor the quarter ending March 31 2014.The manager of this fund is HarshaUpadhyaya since 2012. The minimum investment for this fund is Rs 5,000. In the mutual fund ranking for the quarter ended Mar 31 2014, CRISIL has ranked the Kotak Select Focus fund, Rank 2 ("Good Performer"), in the diversified equity funds category. The fund is suitable for investors looking for long term investment objectives, like retirement planning, children’s education etc. The fund is open for both growth and dividend options. The NAV as on June 8 2014 of the growth option is 18, while that of the dividend option is 16.25.

Portfolio Composition

The fund has a large cap, growth oriented focus. The fund manager follows a focused portfolio management approach, as far as sector selection is concerned. The portfolio is overweight on cyclical sectors, with sectors likeBFSI, Automobile& Auto Ancillaries, Cement, Construction, Oil & Gasand Engineering accounting for about 80% of the portfolio value, as on May 31 2014. To balance its exposure to cyclicals, the portfolio also has allocations to defensive sectors, with IT, Pharmaceuticals and FMCG comprising more than 15% of the portfolio holdings, as on May 31 2014. With cyclical sectors poised to do well with the revival in economic growth and capex cycle, the Kotak Select Focus fund is positioned strongly to do well over the short to medium term. In terms of company concentration, the top 5 companies, ICICI Bank, Larsen and Toubro, Reliance, HDFC Bank, and Ultratech cement accounts for only 23% of the portfolio value, as on May 31 2014. Even the top 10 companies account for less than 39% of the portfolio holdings, as on May 31 2014.

Risk and Return

The Kotak Select Focus fund has consistently outperformed the diversified equity funds category and the BSE – 100 index over the last 3 years. The fund gave a trailing return of over 40% in the last one year. Even in terms of the last 3 years trailing annualized returns, the fund gave a return of 15.7%, outperforming the diversified equity funds category. While the fund has outperformed the diversified equity funds category in terms of returns, the annualized standard deviation of monthly returns of the Kotak Select Focus fund at 16.7%, is lower than the annualized standard deviation of monthly returns of the category. On a risk adjusted returns basis, as measured by Sharpe Ratio, the Kotak Select Focus fund has outperformed the diversified equity category. Sharpe ratio is defined as the ratio of excess return (i.e. difference of return of the fund and risk free return from Government securities) and annualized standard deviation of returns. Higher the Sharpe ratio better is the risk adjusted performance of the fund. The Sharpe ratio of the Kotak Select Focus fund is 0.44, while that of the diversified equity fund category is 0.3. Rs 1 lakh lump sum investment in the fund NFO (growth option) would be at a value of Rs 1.8 lakhs as on June 8 2014. The chart below shows the growth of Rs 1 lakh investment in the Kotak Select Focus fund (growth option). NAVs as on June 8.

The chart below shows the returns since inception of Rs 3000 monthly SIP in the Kotak Select Focus 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. NAVs as on June 8 2014.

The chart above shows that a monthly SIP of Rs 3000 started at inception of the Kotak Select Focus fund (growth option)would have grown to nearly Rs 2.7 lakhs by June 8 2014, while the investor would have invested in total only Rs 1.7 lakhs. The SIP return (XIRR) is nearly 18% over nearly the last 5 years.

Conclusion

The Kotak Select Focus fund has delivered nearly 5 years of strong performance. This fund is suitable for investors with a long time horizon. The fund has been ranked as a good performer by CRISIL. Investors, who are looking for long term capital appreciation with limited downside risks, can consider investing in the scheme through the systematic investment plan (SIP) or lump sum route.Investors should consult with their financial advisors, if the Kotak Select Focus fund is suitable for their financial planning objectives.