It may be risky to take a bet on a stock that is trying to turn around, or a stock that is looking to merge with another. But if you want payoffs from situations like this, look to the L&T India Special Situations fund. Benchmarked against the BSE 200, the fund has comfortably overtaken the index by a margin of six percentage points over the last five years.

Steady performer The fund picks stocks that are out of market favour or undervalued, stocks that are into new business streams, or where the tide can change due to impending reforms, and so on. The closest comparable fund, Birla Sun Life Special Situations, has lagged behind.

But given the riskier profile of the fund’s mandate, it is suitable as a diversifier in your portfolio. A holding period of three to five years is also required for the market to recognise the stocks’ potential and take it higher.

On an annual rolling return basis over the past five years, the L&T Special Situations fund has beaten the BSE 200 index 90 per cent of the time.

Its performance across market cycles is equally satisfactory. In the one- and three-year periods, it has outperformed the BSE 200 by 13 and 6 percentage points respectively.

While the fund has lagged behind multi-cap peers in the one-year period, it has been a top-quartile performer over longer terms of three and five years.

While the scheme can invest across market capitalisations, it usually allocates at least half its portfolio to large-cap stocks, which tempers the risk a bit. Its holdings are also diffused, with the top ten stocks rarely going over 40 per cent of the portfolio. Individual stock exposure doesn’t increase beyond 6-7 per cent. While the mandate of L&T Special Situations is more stock-specific, broader themes such as benefiting from reforms have worked well. For instance, since this year, cement, oil and gas and agro-chemicals were added in. Engineering stocks were picked up in August 2013.

In its latest portfolio, banking stocks take the top sector spot. Software is the other widely-held sector. The two sectors have often been the top holding — it moved away from software in 2012 and into banking and finance, for example.

Special situation Within banking, the fund holds pressured banks such as Punjab National Bank and State Bank of India, but these have worked well in the recent rally.

Similarly, Jyothy Laboratories and Kalpataru Power Transmission are other ‘special situation’ stocks, and the fund has held these for a year-and-a-half to two years.

United Spirits, Praj Industries, Future Retail and Future Lifestyle Retail are other stocks that figure in its portfolio.

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