Last week, Motilal Oswal Focused 25, a large-cap-oriented fund with some mid-cap exposure, turned five, a coming-of-age of sorts among mutual funds. The birthday celebrations may have been muted though. From being a big benchmark-beater and a top quartile category performer not so long ago, the fund’s performance has slipped. Its one-year return (9.3 per cent) is much below the nearly 15 per cent return of the benchmark (Nifty 50 TRI) and the category average of 13 per cent.

The fund’s underperformance over the past 6-7 months has also seen its long-term record getting impacted — its annualised return over three years is now just at par with the benchmark’s. In October last year, the fund’s three-year outperformance over the benchmark (Nifty 50) was about 7 percentage points.

The recent underperformance, fund manager Siddharth Bothra says, is due to a few reasons. The fund is fully into active management, with 60-65 per cent deviation from the benchmark portfolio. In its portfolio of maximum 25 stocks, the fund takes some concentrated bets on stocks it has high conviction on. It adopts a buy-and-hold strategy and does not go by the flavour of the market.

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What’s missing

The fund was underweight on pharma and IT stocks that have staged a strong comeback in recent months. Also, the fund does not have exposure to Nifty major Reliance Industries that has rallied smartly.

Underperformance vis-à-vis the category was due to the above reasons and also lower exposure to mid-caps compared with many peers, says Bothra.

Despite its recent underperformance, investors can retain their holdings in Motilal Oswal Focused 25, while adopting a wait-and-watch approach. The first six months or even a year is too short a period to judge a fund’s performance. Also, despite being on the back foot now, the fund’s annualised outperformance over the benchmark over a five-year period is still a good 3 per cent-plus — a reflection of the strong outperformance, until recently, aided by the focus on high-earning, growth companies. Next, with SEBI’s new categorisation norms that have taken effect, Motilal Oswal Focused 25 has now got more flexibility in stock selection.

More choice

While it fundamentally remains a focussed large-cap fund, it now has a wider universe to look beyond, for its mid-cap picks. Earlier, the fund had an internal mandate to invest at least 75 per cent of its corpus in the 100 largest stocks and a maximum of 25 per cent between the 100th and the 150th stock.

Now, it has a SEBI mandate to invest at least 80 per cent of its corpus in the 100 largest stocks and is free to invest the remaining without stock-size restrictions. This opens up more opportunities to go down the stock curve, with the possibility of higher returns, albeit with higher risk.

From 90-92 per cent of its corpus, the fund has now pared exposure to the top 100 stocks to about 85 per cent with a corresponding increase in mid-cap stocks. It has also, in the past couple of months, added some pharma and IT stocks such as Eris Lifesciences, Ipca and Quess Corp, while moderating exposure to the banking and PSU refining sectors.

The fund has taken big bets in the insurance space with exposure currently at about 17 per cent of the corpus, including in companies such as HDFC Standard Life, ICICI Lombard General Insurance and Max Financial Services. The fund now has 25 stocks in its portfolio.

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