SBI Focused Equity Fund Review: Why portfolio history is important

This is a performance review of SBI Focused Equity Fund. We show how the portfolio history of the fund should first be considered by investors before comparing past performance

SBI Focused Equity Fund Review

Published: November 10, 2019 at 11:51 am

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SBI Focused Equity Fund is an open-ended multicap fund that can invest in a maximum of 30 stocks. In this performance review, we discuss the importance of studying a fund’s portfolio history before considering past performance.

Launched in Oct 2004 as a mid and small cap fund – SBI Emerging Businesses – the fund changed into a focused multicap fund after the announcement of SEBI categorization rules in May 2018 and currently has an AUM of Rs. 5726 Crores and an expense ratio of 1.01% for the direct plan and 2.06% for the regular plan.

According to the scheme document, “SBI Focused Equity Fund will follow a bottom-up approach to stock-picking and invest in companies across market capitalization and
sectors”.  As a focused fund, it will be subject to concentration risk.

Imagine a new mutual fund investor exploring the multicap fund listing at a portal like Value Research (VR). They may not recognise that multicap and focused are two distinct fund categories yet are ranked together at VR. They may get attracted to the (current) five-star rating of SBI Focused Equity Fund and its trailing return ranks.

According to Value Research, the last 3,5, and 10-year ranks are within the top 5 of the category.  The last 1,7-year ranks are within the top 10. Is this enough to establish consistent past performance? Unfortunately no.

Thanks to the rejig caused by the SEBI rules, many funds have completely changed nature and it is not easy for retail investors to recognise and track these changes. Let us start with the market cap history of this fund to illustrate this point.

Market Cap History of SBI Focused Equity Fund

The vertical line represents the change from SBI Emerging Businesses to SBI Focused. Notice how the mid and small cap components reduced and the large cap increased.

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Market Cap Allocation History of SBI Focused Equity FundIt is purely accidental that this coincided with the fall in mid and small cap indices from Jan 2018 making the fund appear as a top performer.  This makes all past performance, star rating (which is based on a mix of the last 3 and 5-year performance) irrelevant.

Both current investors in this fund and future investors should not expect past returns or risk to be reproduced in future.

SBI Focused Equity Fund vs Category (Oct 2019)

SBI Focused Equity Fund-Reg(G)Focused Fund
Asset Allocation
Equity93.0694.48
Others6.945.46
Debt0.06
Top 10 Equity Stocks-Holding (%)
No of Equity Stocks23192
HDFC Bank Ltd.9.448.15
State Bank Of India7.654.6
Procter & Gamble Hygiene & Health Care Ltd.7.21
Axis Bank Ltd.7.093.17
Bharti Airtel Ltd.5.52.48
Divis Laboratories Ltd.5.341.03
Kotak Mahindra Bank Ltd.4.882.97
Bajaj Finance Ltd.4.82.82
ICICI Lombard General Insurance Co Ltd.4.381.23
Bharat Heavy Electricals Ltd.3.970.55
Top 10 Sector – Holding (%) 
Bank29.0726.79
FMCG17.275.42
Power5.72.33
Telecom5.52.89
Capital Goods5.461.73
Finance5.397.85
Healthcare5.344.86
Insurance4.383.28
Chemicals4.373.84
Others3.941.06
Market cap Allocation (%) (As per SEBI Method) 
Large Cap58.7872.96
Mid Cap17.8113.13
Other10.877.12
Small Cap12.546.79

SBI Focused Equity Fund vs Nifty 50 TRI

For what it is worth these are the rolling returns of the fund vs Nifty 50 over 3,5 and 7 years. The decrease in outperformance during recent times is clearly visible in recent times.

SBI Focused Equity Fund Rolling Returns 3 year chart SBI Focused Equity Fund Rolling Returns 5 year chart SBI Focused Equity Fund Rolling Returns 7 year chart

Summary

SBI Focused Equity Fund has a good performance record against the Nifty. However, until May 2018 it was a mid and small cap oriented fund and later on transformed to a focused multi-cap fund.  As of now, it is has a large-cap tilt. This could change if the mid and small cap segments start to move up.

Existing investors should temper expectations and recognise that as a focused fund the risk will be higher. The trouble is, it is hard to place a focused multi-cap fund when there are good diversified multi-cap funds like Parag Parikh Long Term Equity Fund available.

A focused fund unless present in large concentration will not be of much value in a mutual fund portfolio but that would increase risks (concentration and fund manager). Therefore, it is better if new investors avoid focused funds. Existing investors should take a suitable call based on their risk appetites and either quit the fund or increase weight depending on how much they trust the fund manager.

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M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Linkedin
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5 Comments

  1. While most would agree that focused funds are bit riskier compared to large/multicap funds, it also gives a good opportunity to invest in top 25-30 companies that a fund house holds. I feel most focused funds internally are designed like that. I remember mirae team mentioning that.
    Most focused funds have big overlap with the other funds in the same fund house.
    So it’s not a bad idea to invest in them as they are multicap in nature. So best stocks a fund house believes in will make into this irrespective of the market cap.

    So why can’t someone use these in place of mid/smallcaps as these can move across the market caps and also generate better returns with same or similar risk compared to mid/smallcaps?

    A fund house that has good basket of stocks may just be able to do that.

    Just a thought.. someone can comment if they have a different opinion

  2. I agree with Mr Murali’s view. Focused funds like Axis 25 and Franklin are performing well. I am invested in all these funds and will continue as a part of diversification.

  3. Before freefincal info, I invested in 1 value fund and 1 pure multicap fund just because they are clubbed together as multicap. Returnwise ofcourse multicap performed better as well as risk wise atleast in last 3 years. I dont understand how focussed or value are clubbed together with multicap on thes sites and since then I dont follow these sites atleast to see what type of funds to invest in. In a world being dominated by index investing, I dont know how much value investing could end up offering better returns or have be less risky. Same with focussed fund. What would be wrong in directly chosing Nifty Index fund (it would just have some more stocks) against a focussed fund?

    1. A multicap fund is one that can invest in stocks across the market cap. So a fund labeled as Multicap, Focussed and Value, all fall in this basket. Thats why these are seen under the same category in some websites.
      But VR groups Multicap/Focussed as multicap and Value funds under value oriented funds.
      The AUM document will clearly spell out the mode of investment and one must read a bit before being comfortable with investing.
      Googling will help to see the difference.

      Mr. Pattu has already spoken about index funds and they seem to be simplest and cost effective (expense ratio) compared to an actively managed fund. But active funds promise to beat the index more often. Also more ppl are not aware of index funds and there are less options too.

      But experts say its always good to have a multicap fund that can change the portfolio based on market conditions. Its simple for a normal investor who may not track markets regularly.

      In fact experts say, investing in one multicap or/plus a hybrid fund is more than enough, as it provides enough diversification and easy to manage the portfolio.

  4. Thanks for a fantastic analysis of SBI hybrid fund. I already have hdfc hybrid and I am contemplating to add one more hybrid or add increase in existing hdfc fund.

    I saw your video review where u have mentioned that hdfc hybrid has done better than SBI hybrid. I am bit confused since when I do a comparison SBI seem to have done better in last few years.

    Can you pls help in clarifying that how you feel hdfc is still better than SBI.

    Thanks

    Vikram

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