SBI Focused Equity Fund Payout Inc Dist cum Cap Wdrl INF200K01388

The investment focus is on stocks that meet stringent criteria for minimum CAGR and maintained ROC throughout the investment horizon.

The manager strategically selects top stocks, assuming they will outperform the market, focusing on businesses that offer expected returns at reasonable prices, balancing elements of value and growth. Stylewise, the fund isn't strictly value or growth-oriented but leans toward high-quality names. Its active share consistently exceeds 85%, reflecting its benchmark-, sector-, and market-cap-agnostic approach. However, the fund's large size skews it toward large-cap stocks.

The fund operates with few constraints, giving R. Srinivasan significant flexibility in managing it. This high-concentration strategy relies heavily on his stock-picking and execution skills, and while it limits global exposure owing to regulatory constraints, the fund has still managed to generate alpha with domestic stocks. Despite its success, the fund's size results in a lower allocation to small-cap stocks, potentially leading to underperformance in broad market rallies. Additionally, some investments in illiquid stocks pose a risk, though overall liquidity isn't a major issue. These factors influence our assessment of the fund's process, leading us to assign an average rating for the Process Pillar.

The fund initially belonged to the mid- and small-cap category, aligning with that market-cap mandate. Since 2019, it has increased its allocation to large caps, driven by the fund's growth. As the fund's size has increased, it has favored larger-cap stocks owing to their greater liquidity, making significant investments in small-cap stocks more challenging. Additionally, the fund's criteria focusing on quality, growth, and value with a catalyst are generally harder to find. Therefore, the manager invests in high-probability ideas, typically found in the large-cap segment.

Currently, the fund allocates about 55% to large caps compared with the category average of around 65%. The allocation to mid-caps is approximately 35% (category average 20%), and small-cap stocks about 2% (category average 12%). R. Srinivasan has maintained the cash allocation at approximately 5%-7% to ensure sufficient liquidity for capitalizing on market opportunities. The fund also has a healthy allocation to global exposure, ensuring diversification.

Srinivasan aims to invest in businesses for the long term, with a focus on business fundamentals rather than short-term news and trends. While valuation isn't the starting point for evaluating businesses, he still prefers owning businesses at "reasonable valuations" and therefore ensures he doesn’t overpay for good-quality businesses. The team dedicates considerable time to researching what constitutes a "good business model," evaluated against a comprehensive checklist. It doesn't consider price/earnings in isolation but in terms of the implied derivative of cash flow. The team at SBI Mutual Fund uses various quant models to help analysts and managers form opinions on sectors and stocks. The final portfolio composition is left to the manager's discretion.

From a broader theme perspective, the team is optimistic about aspirational consumption, reflected in some of the holdings as a top-down approach. However, stock selection remains purely bottom-up.