WHEN Tata Motors was trying to turn around Jaguar & Land Rover, the Indian company's stock was trading very near to its book value 18 months ago. Months down the line, the strategy seemed to have paid off for the company as well as for investors, who understood the situation then.
Special situations like these often throw up interesting opportunities, which can be capitalised by mutual fund investors.
Known for the special situations theme, Birla Special Situations Fund, Fidelity India Special Situations Fund and HSBC Unique Opportunities Fund offer passive investors an option to bet on such special situations.
Be it M&A or foraying into a new business area or demerger or share buyback, special situation funds screen situations like these to make the most of the opportunities. Mahesh Patil, head of equity (domestic) at Birla Sun Life Mutual Fund, talked of a special situation opportunity in Crompton Greaves. Crompton had strong cash flow and decided to invest a marginal portion of it in its sister concern, Avantha Power, at book value. However, the market perceived it to be negative and hammered the stock. They had invested cash to the extent of Rs 10 per share, but the stock price had fallen by over Rs 20 on the day of the announcement. Our comfort of investment was in valuations at which the company had invested and prospects of the business.
Globally, special situations funds are a big hit with high net worth individuals and institutional investors. The risk with these funds is that all situations may not be profit making. In recent times, we have had situations where subsidiary companies have got listed and this has resulted in value destruction for the parent company, Patil pointed out.
A comparison of returns shows gains notched up by special situations funds (which manage around Rs 1,600 crore of assets) could fall far short of plain vanilla equity diversified funds with just one special fund managing to beat the 30 per cent return given by at least 100 diversified funds.
Special situations funds provide the necessary diversification compared with direct equity investments. The performance of special situations funds being dependent on stock calls, it's important to monitor the skill of the fund manger, how the fund has done vis-à-vis its benchmark index (mostly BSE 200) and the kind of stocks it has picked.
Typically, during heightened economic activity, such funds would do well. Reverse is also true. So the fund manager's performance has to be seen over an entire economic cycle.
Past data indicates that these funds have tended to perform in line with any other diversified equity fund in terms of portfolio holdings and risk adjusted returns and do not provide any compelling reason to have these funds in one's portfolio.
However, with Indian companies increasingly looking at mergers and acquisitions, domestically and internationally, and using other corporate actions to unlock value, it will be interesting to watch the performance and portfolio differentiation that these funds have to offer in future.
Financial advisers say one should use the SIP route to invest in thematic funds. Anil Rego, CEO of Right Horizons, felt risk-taking investors should avoid lumpsum investment.
"Around 5 per cent of equity exposure to special situations funds will do no harm to your portfolio. But hold it for long term," Rego advised.
