Motilal Oswal MoST Focused 25: Prescription for volatility - Buy

This fund suits investors wanting to play it safe while being part of the action

Shrugging off earnings worries and a dip in economic growth, the bulls continue to march on aggressively in the market. But there are concerns in some pockets that the rally may be overdone, at least in the smaller stock universe.

For those seeking to play it relatively safe but still wanting a leg in the market in times such as these, a large-cap oriented fund with a good track record may be just what the doctor ordered. Motilal Oswal MoST Focused 25 fits the bill well. A focused portfolio comprising maximum 25 predominantly large-cap, high-quality stocks has held this relatively young fund (about four-and-a-half years old) in good stead.

While it has participated strongly during market upsides, the fund also held its own during market downsides. For instance, its 49 per cent absolute return in the market rally since February 2016 beats the 43 per cent gain by the benchmark Nifty 50. Likewise, the fund’s loss (16 per cent) during the market fall between January 2015 and February 2016 was much lower than the benchmark’s 22 per cent dip.

The fund’s outperformance has been largely consistent — on a one-year daily rolling return basis, the fund has done better than the benchmark more than 80 per cent of the time. The fund is also in the top quartile in the large-cap category with annualised return of about 17.6 per cent since inception.

The fund follows a buy-and-hold, growth investing approach in a compact portfolio. The fund does not shy away from taking bets in seemingly expensive stocks in which it sees high growth potential. For instance, in the recent past, it invested in the initial public offer of ICICI Lombard General Insurance Company; the stock now accounts for about 3 per cent of the portfolio.

That said, the fund keeps an eye on valuations, exiting stocks that have run up steeply. For instance, in August, it sold its relatively minor stake in Avenue Supermarts (D-Mart) acquired as an anchor investor during the primary issue.

A small portfolio (currently only 21 stocks) means that the fund takes some concentrated bets. For instance, HDFC Bank, HDFC and Maruti Suzuki account for 8-9 per cent each of the corpus. But the focus on high quality blue-chip stocks mitigates the concentration risk.

Until recently, a small corpus meant that the fund’s expense ratio was relatively high compared with peers. But with a steady increase in the corpus size (₹807 crore as of September 2017), the expense ratio has come down (2.51 per cent for regular plans); this should go down further when the corpus crosses ₹1,000 crore. The fund has a philosophy of remaining almost fully invested in equities (98-99 per cent of corpus) across market conditions. So, it does not take big cash calls, unlike some peers, even when markets seem expensive.

Sector calls

MoST Focused 25’s largest exposure is to the banking, financial services and insurance sectors (about 45 per cent of the portfolio). This is entirely in private sector stocks, with the exit from SBI earlier this year. With the fund manager Siddharth Bothra sanguine about the prospects of insurance players, especially private sector ones, the fund has exposure, directly or indirectly, to insurance players ICICI Prudential Life Insurance Company, Max Financial Services and Bajaj Finserv.

Over the past year, the fund has exited some beleaguered sectors — software (Infosys) and pharma (Lupin). Meanwhile, it has upped stake in electric equipment (Havells India) and technology (ABB) providers.

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