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L&T Opportunities Fund

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Opportunities funds, as the name suggests, invest in stocks of companies across market cap segments (i.e. large cap, mid cap, small cap) and across sectors. Due to their fluid investment style, these funds stand a better chance of benefiting from attractive investment opportunities in various market cap segments as well as sectors. In practice, this depends mainly on the fund manager's expertise in identifying and tapping on investment opportunities well before others. A well-managed opportunities fund can add significant value to an investor's portfolio over the long-term.

L&T Opportunities Fund (LOF) is one such open-ended diversified equity fund from the stable of L&T Mutual Fund, which follows a blend style of investing. LOF is primarily mandated to invest in equities and equity-related securities of Indian companies along with debt and money market instruments. Launched in November 1997, the fund has completed a little over 13 ½ years of existence now.

The fund's primary investment objective is "to generate long term capital appreciation from a diversified portfolio of equity and equity related securities. The fund will invest in a universe of stocks, which will be identified using fundamental analysis. The fund will invest in a portfolio of both value and growth stocks. The strategy will be to build up diversified portfolio of quality stocks, with medium to long term potential."

The fund is mandated to invest 80% - 100% of its total assets in equity and equity-related instruments, and the rest (upto 20%) in domestic debt and money market instruments, to manage its liquidity requirements and as defensive stance.

The Fund evaluates stocks based on the following factors amongst others

·         Business dynamics

·         Free cash flow generation

·         Financial strength of the company (which includes return on capital employed and return on equity)

·         Management quality, strength and vision

 

LOF adopting both – a top-down as well as a bottom-up approach imbibes in it the flexibility to actively shift its portfolio concentration between different market capitalisation buckets and across sectors. LOF has so far refrained from churning its portfolio too often (as revealed by its petite portfolio turnover ratio of 0.55 times).

 

Equity Portfolio

As indicated by the table above, Top 10 holdings of LOF constitute majorly of blue-chip stocks. LOF is benchmarked against the S&P CNX Nifty Index. The latest disclosed portfolio (as on September 30, 2011) of LOF holds 53 stocks. Top 10 holdings form 37.8% of the equity portfolio while allocation to top 5 sectors has been 42.73%.

Its complete portfolio discloses the dominance (68.0%) of the 'A' group ones, while holding in 'B' group stocks is to the tune of 32.0% of its equity portfolio. The fund's exposure to debt and cash over the past one year has not been more than 15% which indicates its tilt towards staying invested in equities. Interestingly, the fund has been maintaining significant exposure to index derivatives (futures) over last six months.

But despite maintaining a balance across market cap segments, the fund has faltered on the performance front.

 

How LOF has fared vis-à-vis its peers

The table above reveals that across time frame, LOF's performance is nothing to vie for. Over a 3-Yr and 5-Yr time frame the fund has clocked return of mere 18.3% CAGR and 9.4% CAGR respectively. Although it has managed to outperform its benchmark (S & P CNX Nifty) on 3 and 5 year returns, it has failed to match the performance of the benchmark over the last one year when markets were choppy and turbulent.

When assessed on the volatility front too, LOF has exposed its investor to high risk (as revealed by its Standard Deviation of 10.70%), but has failed to compensate adequately (as revealed by its Sharpe Ratio of 0.09). This thus makes LOF a high risk-average returns investment proposition in the category.

 

Fund Manager Profile

Name of the Fund Manager

Mr. Pankaj Gupta

Total Work Experience

Over 13 years

Managing the fund since

Sep-10

Qualifications

B.Com (Hons.), IIM (Lucknow)

 

Despite maintaining a balance across market cap segments and avoiding aggressive cash calls, L&T Opportunities Fund has faltered on the performance front. While the fund manager has adopted a "buy and hold" strategy, the lower risk adjusted returns reveal that the fund has not been able to spot the rewarding opportunities in the market. Higher exposure to derivatives too might have contributed to the underperformance but that is just a possibility. L & T is a process driven fund house managed by an experienced management. Despite this, the fund has disappointed.

Investing merely in an opportunities fund would not help you capitalise on the investment opportunities available in the market but a careful selection of a fund would enhance your chances to be well placed to exploit the opportunities. Furthermore, risk management remains the key in an opportunities fund.

We believe investors should be better off investing in a fund which has a proven track record and is managed by a process driven fund house.

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