No Silver yet, for these 2 funds from the SBI stable

By Morningstar Analysts |  01-10-18 | 

Our analysts look at two equity funds from the SBI Mutual Fund stable and assign ratings accordingly.

SBI Magnum Midcap Fund

A research-intensive bottom-up approach that aims to reduce downside risks and invest in high growth stocks.

  • Category: Equity: Mid Cap
  • Star Rating: 2 stars
  • Analyst Rating: Bronze
  • Date of Analysis: September 2018
  • Fund Manager: Sohini Andani
This is an absolute return mid-cap strategy investing in the fund manager’s high-conviction ideas. While conscious of valuations, the team evaluates a company’s management and focuses on stocks that are able to meet its threshold in terms of CAGR and a consistent ROCE over a three- to five-year horizon. It emphasizes management and takes into consideration the promoter’s integrity, past track record, holding in the company, and so on; it looks to invest in businesses with high entry barriers.

The in-house model portfolio forms the basis for stock selection and consists of the team’s best ideas. Valuations are looked at on an absolute basis relative to the stock’s 10-year history.

The fund has largely maintained an orientation towards growth stocks and is focused on long-term (three to five years) visibility. We think its approach towards investing in companies with a high ESG scoring is a positive measure towards maintaining a "clean" portfolio.

The team takes a sector view as a fund house, with stock selection being left to managers who could remain uninvested in sectors where they don’t find the right opportunities. Andani believes the opportunity costs of investing in these stocks are fairly high and will exit from them irrespective of the levels that they are trading at. While the team avoids event-based investing (possibility of a merger/acquisition, and so on), it tends to invest in IPOs.

Andani aims to invest in firms with a relatively high risk/reward ratio. The mandate allows the fund to invest up to 35% in other equity stocks; she holds about 15% in large-cap stocks. These are largely mid-caps that have grown into large caps owing to market valuations moving up. While she invests in IPOs, these investments are based on a long-term view and in-depth research given the relatively higher risks.

However, she is quick to exit these stocks if they don’t play out as expected. While she remains invested in few IPO stocks like Housing and Urban Development Corp, Sheela Foam, and Equitas Holding, she has exited names like Narayana Hrudayala and Thyrocare.

The fund has more than doubled in size in the past two years. However, the core mandate and strategy of the fund remain undiluted, except for a small increase in the number of holdings.

The portfolio is well-diversified and comprises around 50 stocks, with the top 10 holdings accounting for around 40% of the portfolio. We view this diversified approach as a positive from a liquidity perspective and prefer mid-cap strategies that are diversified across stocks and sectors. At a sector level, healthcare remains a significant portion of the portfolio. Andani has also been trimming exposures to cyclical stocks in the past two years. Reduction in exposures to stocks like Motherson Sumi, Swaraj Engines, and Page Industries typify this approach.

Access more information on the fund and read the short analyst synopsis here.

SBI Large & Midcap Fund

The fund has to stand the test of time under a new manager and investment mandate. 

  • Category: Equity: Large & Mid Cap
  • Star Rating: 4 stars Analyst Rating: Neutral
  • Date of Analysis: September 2018
  • Fund Manager: Saurabh Pant
  • Before Recategorization: SBI Magnum Multiplier was run with a flexi-cap approach

Under Jayesh Shroff, the investment approach used to have a strong growth bias with investment in companies which were typically leaders in their domain. Therefore, large-cap stocks used to dominate the portfolio despite having a flexi-cap mandate.

Saurabh Pant, on the other hand, plies a valuation-driven approach and prefers moving freely across market segments based on their relative valuations. But the fund’s new investment mandate has made it mandatory for the fund to have at least 35% of assets each in large- and mid-cap stocks. This would amount to limiting his freedom to an extent.

Though value forms the premise of Pant’s investing style, he does not mind paying more for a stock if he is confident of its long-term growth trajectory. His investment in Sheela Foam is a case in point. For investing in mid/small-cap stocks he prefers companies which are liquid, with good management, profitability, and high corporate governance standards. However, he is relatively less particular with his large-cap investments and focusses on companies which offer good growth prospects at attractive valuations.

Pant uses a combination of top-down and bottom-up approaches for selecting stocks, with the latter being more prominent. While constructing the portfolio, he invests more than 40% of assets in large-cap stocks, 35%-40% in mid-cap stocks, and the balance in small-cap stocks. For mid-cap allocation, he restricts his investment universe to the middle of the SEBI-defined mid-cap bucket. This is to avoid regular churn in the portfolio in case of frequent changes in the constituents of the mid-cap bucket, which would typically be common at the top and the bottom of the bucket.

Currently he is focussing on areas which are compelling on the valuation front, such as technology and communication services. The fund’s structure requires the manager to employ a benchmark-conscious approach with a defined deviation range from the benchmark index across sectors and stocks. Pant, however, is aggressive in his approach and would not hesitate to use the entire range available.

Cash exposure is capped at 10%.

Changes in the fund’s investment mandate, category, and peers set have made the fund’s past track record less relevant. Also, these are early days for Saurabh Pant at the helm of this fund and hence it doesn’t imbue conviction in the absence of a long-term track record.

The fund’s performance under Pant (September 2016 - August 2017) doesn’t stand out; an annualised return of 12.2%, underperforming 67% of its category peers. Multiple reasons. After taking over, Pant restructured the portfolio to align it with his value style of investing, which resulted in the exit of some better-performing growth stocks. Additionally, demonetisation towards the end of 2016 had an adverse impact on the fund’s performance. In 2017, Pant's valuation-conscious approach struggled in the growth-oriented and momentum driven market.

The fund has been going through a rough phase this year as his investments from the financial services sector and his contra bet in communication services didn’t pan out as expected. Also, given the polarised nature of the markets this year, the manager’s investment style has not been able to deliver results as per expectation.

Pant must display exceptional execution capability to bring the fund back to its winning ways, an aspect which needs to be evaluated over time.

Access more information on the fund and read the short analyst synopsis here.

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