L&T Emerging Businesses Fund: Right calls deliver superior returns

Launched in May 2014, L&T Emerging Businesses Fund is classified under the small and mid-cap equity funds of CRISIL Mutual Fund Ranking. It featured in the top 30 percentile (CRISIL Fund Rank 1 or 2) in the category for three consecutive quarters ended December 2017. S N Lahiri has been managing the equity component of the portfolio since the fund's inception and Karan Desai foreign security investments since February 2017. The quarterly average assets under management of the fund stood at Rs 26.51 billion for December 2017 quarter. 

The investment objective of the scheme is to generate long-term capital appreciation from a diversified portfolio of predominantly equity and equity related securities, including equity derivatives, in the Indian markets with key theme focus being emerging companies (small cap stocks). 

Consistent outperformance 

The fund has consistently outperformed the benchmark (S&P BSE Small Cap Total Return Index) and its category (funds ranked under the small and mid-cap category in December 2017 CRISIL Mutual Fund Ranking) in all time frames under analysis. 

The fund outperformed the benchmark in both the market phases since its inception. It declined less than the benchmark during the Chinese slowdown phase. During the recent rally led by global liquidity and domestic reforms, the fund delivered superior returns than the category and the benchmark. 

An investment of Rs 10,000 in the fund on May 12, 2014 (inception) would have grown to Rs 28,130 on April 11, 2018 at an annualised rate of 30.21 per cent, surpassing the category and benchmark which would have grown to Rs 24,848 (26.15 per cent per annum) and Rs 24,410 (25.58 per cent), respectively. 

A systematic investment plan (SIP) is a mode of disciplined investments offered by mutual funds to investors through which one can invest a certain amount at regular intervals. L&T Emerging Businesses Fund outpaced its benchmark during the past one year, two and three years. 

Portfolio analysis 

During the past three years, the fund has maintained an average allocation of 92 per cent to equities with most of this exposure to small and mid-cap stocks. The fund took exposure to 172 stocks during this period and maintained exposure to 63 stocks, on average, on a monthly basis. 

It took exposure to 30 sectors in three years. The top five sectors are industrial products with average allocation of 9.64 per cent, auto ancillaries (7.7 per cent), construction project (7.28 per cent), banks (6.61 per cent) and industrial capital goods (5.82 per cent). 

KEI Industries was the highest contributor to the fund's performance from the industrial products sector during three years. Suprajit Engineering and Indian Bank were the major contributors from the auto ancillaries and banking sectors, respectively. Indian Hume Pipe Company and Skipper were the top contributors from the construction projects and industrial capital goods sectors, respectively. Avanti Feeds, Aarti Industries and Balrampur Chini Mills were the highest contributors to the fund's performance during this period. 

The fund increased allocation to the industrial products sector from 4.41 per cent in February 2016 to 12.59 per cent in February 2018. This was beneficial to the fund since S&P BSE Industrials returned 68 per cent absolute returns between February 2016 and February 2018 compared with 62 per cent delivered by the broader Nifty 500 TRI. Allocation to the pharmaceutical sector was reduced from 6.66 per cent in September 2016 to 0.79 per cent in November 2017. This proved to be an accurate call by the fund since the Nifty Pharma TRI declined by 18.86 per cent during this period while the broader Nifty 500 TRI grew by 25.54 per cent during the same period. 

Out of the 172 stocks the fund invested in during the past three years, it has consistently held nine, with average exposure of 16 per cent. This indicates that the portfolio is very actively managed and has a high rate of churn. Five out of nine consistently held stocks outperformed the benchmark during this period. Among the consistently held stocks, Aarti Industries, Indian Hume Pipe Company and The Ramco Cements were the key contributors to the fund's performance.