A look at 3 equity funds from SBI Mutual Fund

By Morningstar Analysts |  08-11-19 | 
 

In the month of October, our analysts looked at three equity funds from the SBI Mutual Fund stable. Here's a brief summary.

SBI Bluechip

The AMC differentiates funds based on absolute and relative-return frameworks.

The Bluechip fund is a relative-return strategy focused on incremental fundamental change, positive market expectations, and relative valuations, measured by sales growth, EBITDA margins, and market share changes. They look at  companies in terms of their visibility of growth and undertake company visits to evaluate their business models. They have an active universe of stocks that are reviewed on a quarterly basis.

The filters for relative and absolute funds are clearly defined, but stocks could fall into either framework, and the differentiation could blur.

The fund has largely kept an orientation towards growth stocks and is focused on long-term (3- to 5-year) visibility. The team tends to avoid momentum-based ideas and focuses on bottom-up stock-picking which overlooks short-term market aberrations. This could lead to some short-term underperformance.

We think their approach towards investing in companies with a high environmental, social, and governance score is a positive measure towards maintaining a “clean” portfolio.

Andani’s focus on ensuring that the fund’s downside risks remain protected is reflected in the fund’s capture ratios. The three-year upside as well as downside capture ratios for the fund are broadly in line with the category average.

The Bluechip fund has grown from Rs 38 bn in January 2016 and reached Rs 214 bn as of August 2018. Liquidity is not an issue with large-cap funds, but we are wary of the impact that increased fund size places on the execution of the strategy. Having said that, inflows into the fund have remained gradual and steady over the years.

SBI Large & Midcap

Saurabh Pant plies a valuation-driven approach. Within the defined boundaries of the category, he prefers moving freely across market segments based on their relative valuations.

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. However, his valuation-conscious approach has not been successful to the extent it should have been; one of the reasons for this has been his investments in a few deep-value stocks, which have had an adverse impact on the fund. Going ahead he would avoid committing too much in such stocks.

For mid/small-cap stocks, he prefers companies that are liquid and have good management, profitability, and high corporate governance standards. However, he is relatively less particular with his large-cap investments and focuses on companies that offer good growth prospects at attractive valuations. The strategy is not without risks. Pant’s focus on valuation could result in the fund underperforming during growth-oriented and momentum-driven markets. Hence, the success of the strategy rests significantly on his execution capability.

SBI Focused Equity

In keeping with the fund’s "aggressive" label, R. Srinivasan constructs a portfolio of roughly 30 stocks, with the top 10 accounting for roughly 50% of assets. Though the fund bears little resemblance to its underlying index, a few benchmark stocks like HDFC Bank and Kotak Mahindra Bank have remained long-term holdings.

Conventionally, large caps accounted for roughly 15%-30% of the fund, but this has changed since our last review. The fund currently invests up to 50% of assets in large-cap stocks, and this lowers liquidity risks in the portfolio. Over the past two years, a large-cap stock like HDFC Bank has been contending with a mid-cap name like Procter and Gamble Hygiene Care for the top position. Another area in the fund’s makeup is its allocation towards small caps, which traditionally accounted for over 55% but currently constitute only about 5% of the portfolio.

It’s not uncommon for new stocks to routinely enter/exit the portfolio based on factors like valuations and a change in fundamentals.

Stocks like Kirloskar Oil Engines, Hawkins, and Bajaj Finserv have recently been sold off based on slower growth. The portfolio bears Srinivasan’s professed investment style: Over the years, value picks such as Emami and Blue Star coexist with growth stocks like Kotak Mahindra Bank and Avenue Supermarkets.

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