IIFL Focused Equity Fund: Identifying Opportunities in Business Cycles

However, on the off chance that the fund manager's bets do not pay off as expected, investors may incur heavy losses due to high concentration of the portfolio. Therefore, it is important to select focused funds for your portfolio carefully.

IIFL Focused Equity Fund is a Focused Fund that has made an impact in a shorter time span compensated investors well for the level of risk taken.

Data as on October 19, 2021
(Source: ACE MF)

IIFL Focused Equity Fund has consistently maintained a clear lead over its benchmark, S&P BSE 200 -TRI, as well as most of its category peers and has generated a noticeable alpha in the last couple of years. The fund has outpaced many of its peers and managed to build a strong performance track record. Over the last 1-year, 2-year and 3-year periods, IIFL Focused Equity Fund has outperformed the benchmark and the category average by around 7 to 10 percentage points. Even on the longer 5-year horizon, it has outpaced the benchmark by around 3.5 percentage points.

Its recent outperformance has helped the fund improve in terms of risk-adjusted returns as well and enabled it to stand strong vis-a-vis its category peers. IIFL Focused Equity Fund has recorded volatility in line with the benchmark and the category average while it clearly stands-out in terms of risk-adjusted returns as denoted by the Sharpe ratio.

Investment strategy of IIFL Focused Equity Fund

Classified under Focused Funds category, IIFL Focused Equity Fund has a mandate to allocate minimum 65% of its assets in equities investing in a maximum of 30 stocks. Accordingly, IIFL Focused Equity Fund holds a compact portfolio of around 30 high conviction stocks. The scheme endeavours to identify the sectors that are likely to do well in the medium term, based on the business cycle of the economy, and take focused exposure to securities of companies in the identified sectors. The sectors are actively monitored and changes are made to invest in sectors that will benefit from the current stage of the business cycle.

IIFL Focused Equity Fund utilises a SCDV (Secular, Cyclical, Defensives and Value Trap) investment framework to identify high conviction stocks and determine its weightage in the portfolio:

S- Secular - Companies with consistent ROE & PAT growth > 15%

C- Cyclical - Companies with PAT growth > 15% but ROE < 15%

D- Defensive - Companies with ROE > 15% but PAT growth < 15%

V- Value Traps - Companies with both ROE & PAT growth < 15%

IIFL Focused Equity Fund utilises the bottom-up approach to pick stocks across market cap segments; however, it maintains a large-cap bias. The turnover ratio of the fund in the last one year ranged between 40%-60%, signifying moderate churning in the portfolio.

Being a Focused Fund, IIFL Focused Equity Fund invests in a concentrated portfolio of 25-30 high conviction stock ideas. As on September 30, 2021, the fund held 30 stocks in its portfolio. Top large-cap stocks from companies such as, ICICI Bank, Infosys, HDFC Bank, Axis Bank, and L&T currently figure among the other top holdings in the fund's portfolio. Mid cap names such as SRF and Crompton Greaves Consumer Electricals also form the part of its top holdings. The top 10 stocks combined account for 53.1% of its assets. Some of these stocks have been part of the fund's portfolio for over 2 years now.

IIFL Focused Equity Fund benefitted immensely from ICICI Bank, L&T Infotech, SRF, Bajaj Finance, Cyient, Infosys, and Apollo Tricoat Tubes, that have contributed over 35% to its absolute gains in the last one year.

Notably, IIFL Focused Equity Fund's portfolio is skewed towards stocks in the Banking and Financial sector that collectively form 31.6% of its assets. It also held major allocation to Infotech, Auto & Auto Ancillaries, and Engineering that form another 37.8% of its holdings. Some other core sectors in its holdings are Telecom, Pharma, Consumer Durables, Consumption, Petroleum Products, among others. IIFL Focused Equity Fund's portfolio is fairly diversified across cyclical, defensive, and sensitive sectors.

Suitability

IIFL Focused Equity Fund has built a commendable performance track record in a shorter time span and rewarded investors across the market phases it has witnessed so far. During depressed market conditions it has managed to limit the downside risk more efficiently compared to the benchmark and many of its category peers. Moreover, during bull phases, it has stood among the top quartile performers in the focused funds category.

Over the last few years, IIFL Focused Equity Fund has outperformed many of its prominent peers in the category. IIFL Focused Equity Fund has achieved this without exposing the portfolio to unnecessary risk. Notably, its Sharpe Ratio is currently the best in the focused category. With this, the fund has rewarded its investors with superior risk-adjusted returns.

IIFL Focused Equity Fund is suitable for investors looking to earn decent alpha through a concentrated portfolio of high conviction stocks with a long term horizon of at least five years.

Warm Regards,
Divya Grover
Research Analyst

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Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

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