The traditional mutual fund categories of large-cap, flexicap, midcap or smallcap will always find place in a portfolio. But once you’re done with introducing style diversity through growth or value funds from these categories, where can you go if you want to add other differentiators?
One way is to look at less homogenous categories. Here, the thematic category presents an eclectic collection of funds. While many of these thematic funds are new, they offer differentiation and are therefore worth a look.
We already have two of these in Prime Funds – ICICI Pru India Opportunities and Franklin India Opportunities. In the recent Prime Funds review, we identified and added one more – White Oak Capital Special Opportunities under the High Risk Turnarounds category.
This is an out-of-the-ordinary call for us, given that the fund was launched only in June 2024. The reasons were as follows:
- The fund’s differentiated strategy and portfolio with low overlaps between other funds and the Nifty 500 index
- The very strong performance it has clocked since its inception, compared to both older, more established funds as well as fellow new funds.
- Strategy of locking into profits or trimming losses through active churn of the portfolio, and its ability to tap into short term stock price moves
- The need for investors to tap into fresh opportunities ahead of time, without waiting for a long track record to establish. In the current range-bound market, where stock and sector shifts are swift, it is important to include a variety of funds in the portfolio to get above-market returns.
But why this particular fund? Here’s the rationale.
Defining special opportunities
White Oak Capital Special Opportunities (WOC Special Opportunities) is classified under the thematic category. The ‘theme’ here is special opportunities, which loosely translates into stocks going through a unique situation or challenge. The fund tries to swoop in stocks where prices have declined or valuations are supressed due to a unique situation or event.
Every fund playing on this theme has a different definition of what constitutes a special situation. For WOC Special Opportunities, it means the following:
- Corporate restructuring or events such as mergers & acquisitions, stock splits and other corporate actions etc
- Regulatory changes or geopolitical issues
- Sector disruptions or emerging trends/sectors
- Other temporary challenging situations a company or a sector might find itself in, but which do not structurally alter its business potential
Naturally, such a strategy will require a stock-specific approach. WOC Special Opportunities is benchmark-agnostic and invests across market capitalisations.
Dynamic portfolio shifts
The fund’s marketcap allocation has been skewed towards the mid and smallcap segment which makes up about half the portfolio. This is in line with peers such as Franklin India Opportunities or ABSL Special Opportunities, but is much higher than ICICI Pru India Opportunities.
In its stock allocations, WOC Special Opportunities is extremely diversified with over 50-70 stocks. Top holdings are also not too concentrated, with the top 20 typically making up about half the portfolio. The fund, therefore, sports a very long ‘tail’ of stocks with small allocations to each. The table below shows the top 20 stocks currently in its August portfolio.
This strategy of starting with small allocations can have two benefits. One, the fund can take advantage of more opportunities. For example, a bet on a stock such as KRN Heat Exchanger could be to ride the temporary euphoria post the company’s IPO, Bharat Dynamics could be a bet on the surge in interest in defence stocks earlier this year. Two, it reduces the risk of calls going wrong, since a ‘special situation’ call is probabilistic in nature and may not play out as expected.
The fund’s portfolio moves also do not suggest a buy-and-hold approach. It is extremely active on multiple fronts. It frequently trims exposure in stocks to book profits and realize gains. It gradually builds up positions in some sectors or stocks. It also trims exposure or entirely exits stocks to cut losses, which is a plus given the very high risk nature of its strategy and the enormous portfolio it owns.
Between the June and August portfolios, the fund reduced allocations in over 45 stocks while increasing allocations in 28. It booked profits in stocks such as Hitachi Energy, Cholamandalam Finance, Kotak Mahindra Bank, Lumar Auto Technologies etc. It built up exposure in stocks several stocks from capital goods, engineering, power & infrastructure such as Ajax Engineering, Bharat Electronics, GE T&D, TD Power Systems. Other larger sectors in the portfolio are financials; while it holds the primary banks of ICICI, HDFC, and SBI, the fund also holds others from the financial sector such as CAMS, BSE, Care Ratings, and Aadhar Housing Finance.
As a result of its frequent changes, the fund’s portfolio churn is among the highest compared to other special opportunities funds or multicap funds.
Minimal overlap
WOC Special Opportunities has only about a 26% overlap with the Nifty 500 index and a 24% overlap with the Nifty 500 Multicap index. It also shares a low overlap with the other two opportunities funds in Prime Funds.
Apart from sharing minimal similarities with opportunities funds, WOC Special Opportunities is also different from funds in the traditional flexicap/multicap categories. This makes it a good addition to portfolios as it provides differentiation in both strategy and portfolio.
Good performance start
With an inception in June 2024, WOC Special Opportunities does not have much of a performance history to show. So far, on a 1-year rolling return basis, the fund beats the Nifty 500 Multicap 25:25:25 index (since it is mid-and-smallcap heavy) all the time. The average outperformance margin is a handsome 13 percentage points. This is a good show, compensating for the fund’s high active share and high-risk strategy. It also beats other opportunities funds.
Of course, there aren’t too many 1-year periods given its short history. Breaking it down into 6-month periods can show if there is any slip in returns after an initial robust start. On this front, WOC Special Opportunities has held steady in outperformance. The table below shows the performance of the fund against other opportunities funds.
WOC Special Opportunities is also among the best performers in the crop of ‘new’ funds. In the past couple of years, there have been over 50 active equity funds launched (i.e., equity funds that are not index funds or sector-themed). Of these, WOC Special Opportunities is in the top quartile; this is also one of the reasons why we opted to dig further into this fund as opposed to the other new funds.
On the volatility front, WOC Special Opportunities is much more volatile than the Nifty 500 Multicap index. Volatility is also higher than Franklin India Opportunities or ICICI Pru Opportunities. However, on the positive side, WOC Special Opportunities is still able to contain downsides reasonably well. Based on rolling 1-month returns since its inception (the metric we usually consider for downsides), the fund scored similar to Franklin India Opportunities in downside capture.
Risks and suitability
While WOC Special Opportunities has got off on a flying start, it is an extremely high-risk bet. The risks come from the following:
- The underlying strategy which involves a mix of longer-term calls and cashing in on short-term opportunities. A flat or a falling market cycle may not always throw up such opportunities. The fund has obviously not been through a proper down-market yet. The strategy also requires the fund to consistently identify such opportunities, especially with the very large portfolio it has been maintaining so far.
- The heavy mid-and-smallcap tilt which leaves it vulnerable to the inherent volatility and risks in such stocks.
- The lack of a track record that makes it difficult to judge how sustainable performance is and how consistent it can be at beating peers and index.
Therefore, the fund suits only high-risk investors who are willing to include new funds that are not yet tried-and-tested. It is also especially useful in larger portfolios of say Rs 25 lakh or more, where there is enough room to add more funds. However, keep allocation to the fund within 5-7% of your portfolio. Treat the fund as a tactical call presently, and not as part of your core portfolio, until it establishes a more consistent track record. Be prepared to make an exit if performance shows signs of faltering.
WOC Special Opportunities can be paired with any Prime Fund or even with funds from the normal categories of largecap/flexicap/midcap etc. You can invest in it even if you hold other opportunities funds from Prime Funds.
As mentioned at the start, in these markets, it is important to pick up fresh opportunities to complement the more traditional core of your portfolio. We have been looking at such opportunities and adding them to Prime Funds. We’ll continue to be on the lookout for such differentiated funds!
17 thoughts on “Prime Fund Recommendation: A high-risk, off-beat equity fund”
Good discussions, thanks to PI. Two points :
1. May i request ICICI Pru Business Cycle Fund to be compared this WOC Special Opp. Fund.
2. Further, it might be a good idea to create a New Kids List under PRIME PORTFOLIO of the funds from Helios, OldBridge, Zerodha, Groww & WOC. May be categorize MF houses into Less than 3 yrs existence & greater than 3 yrs..
Nice idea 🙂 But we aren’t about to recommend funds from all new AMCs, much less put them all into a portfolio even if call it an at-your-own-risk portfolio! With regard to IPru Business Cycle, the observations are overall the same – low portfolio overlap, WOC is by far riskier. IPru business cycle is similar to IPru Opportunities in terms of market cap allocation, but the Opportunities fund has generally delivered better returns. – thanks, Bhavana
Dear Bhavana
I read and then re-read and then read a couple of times more the paragraph named ‘Defining Special Opportunities’. Then I went through the fund’s portfolio. Then again went back to ‘that’ paragraph a few times trying to find the correlation. Failed every time.
I always thought a good fund analyst:
• Suggests fund houses with long proven track records
• Suggests funds with long proven track records
• Suggests funds which have a well-defined investment strategy/philosophy and a track record of following their own strategy/philosophy
• Suggests fund with lower churn
• Rates long-term performance well above short-term performance
• Rates all the above points well above a short-term outperformance
This fund review (and a couple of others that came out lately) turns head-over-heals whatever we have learned from your team (and other experts over the last few decades) about fund selection.
My personal opinion is that this fund is just high on momentum steroids (just like several other funds launched in the last 1 to 2 years under different names and categories) which works well for personally run stock portfolios, but may end up very badly for a mutual fund. So, I’ll keep my safe distance from this fund (and any other fund whose name itself smells of misleading tactics and mis-selling).
I hold PI research team in very high regard, but this article is of the quality that I would expect from a new-age online brokerage or an influencer, not from PI.
Best regards
Thanks for the feedback, appreciate your point. So, the primary approach we follow for fund analysis and recommendations is as you said – wait for track record and consistency, look at portfolio churn and strategy, and look at downside containment. These are the criteria for our main recos in Equity Moderate & Aggressive. We wouldn’t ever put any fund that wasn’t properly established here.
But we also need to adapt to changing situations. From what we have observed, the pure mid-cap or smallcap funds are not that great at adding return to a portfolio and in the past few years several of them drop and rise compared to the index. Market cycles are also much shorter and sector/stock shifts are also quicker. So for some funds that are less dynamic, that means a period of underperformance before there is a pick up, and we have seen this playing out in several funds.
So, if one is looking for higher-return funds or to try to compensate for some underperformance through style diversification, there needs to be some options. This apart, momentum as a strategy is not entirely wrong. It can well be used in small doses in a portfolio and are in fact good complements to a buy-and-hold approach. Also, there are several new AMCs where approaches are fresh and waiting until a track record is established may mean missed opportunities.
For these reasons we had, a few quarters ago, introduced a new section altogether in Prime Funds called High Risk where we housed such up-and-coming options. If these establish themselves, then we had the option of moving them to the main Prime Funds categories. We had added Kotak Multicap here some time ago before it hit a 3 year record and then moved it to the main Aggressive category. We’ve had Badhan Large-and-Mid here for some quarters now and it’s performance has held up – but we’d had JM Value here earlier and removed it as its outperformance started to flag. Because these funds are extremely high risk, we specifically say that allocations should be low so that any slip here, plus quick action to remove it, is not very detrimental to overall returns.
Basically, the approach we’re trying to explain is to have the established funds as the main part of a portfolio, and use such funds as tactical or high-risk high-return opportunities to boost returns. Of course, this approach is not everyone’s cup of tea and are well avoidable 🙂 Requires a bit more active management, certainly. Hope this clarifies and explains how we look at fund recommendations. – thanks, Bhavana
Cannot agree more…we need to adapt to changing situations…. new mutual fund houses like Helios, WhiteOak, OldBridge need to be looked at …
Thanks for the article. Will be looking forward to more such differentiated fund recommendations.
A few questions:
1. “You can invest in it even if you hold other opportunities funds from Prime Funds.”
Is this because of the low overlap and the performance of the WOC fund, or is there any major difference between their strategies like say how they define a special opportunity?
2. Looking at the volatility, if one had a lump sum, would you say they should go for a flexi STP based on the NAV (assuming it’s available) or a one-time full investment?
3. On the portfolio level should there be a limit on the total number of (or percent allocation to) such high-risk funds?
I understand that such calls will be few and far between, but is it ok to keep adding such funds till the time you give a sell call on any of them?
1. Both because of low overlap and the strategy. ICICI Pru for example is less aggressive and more buy-and-hold.
2. Use SIPs/STPs for any lumpsum investments that are more than 4-5% of your entire portfolio. If the lumpsum is small, then there is limited benefit in SIPs
3. As far as number of funds go – you need to first peg how much allocation you want in high-risk funds based on your timeframe & risk. Then you can decide the number of funds. Number of funds also depends on your investment amount – for larger amounts, you can have more funds. This article will give you an idea Don’t keep adding funds every time we give a recommendation, you will wind up with too many funds. Add funds only if they offer differentiation and only if your portfolio has the room to add more funds. – thanks, Bhavana
Thanks.
Just to confirm, when you say ‘4-5% of your entire portfolio’, you mean the entire equity portfolio, right? Or, is it inclusive of debt too, in the form of funds, PPF, NPS etc?
It is part of your total portfolio – equity and debt. Of course you need to consider whether you already hold risky funds before venturing into these. Thanks, Vidya
I have given up on Prime Stocks already. Because unless one has sharp expertise of the field already they will end up a “Prime Investor Equity Fund” if they follow the Prime Stocks, and they have sharp expertise they will not require Prime Funds.
I am starting to feel the same about Prime Funds recommendations. How many funds one is supposed to invest in? When to switch/replace, when to dump and move on to something else or existing funds? Keep adding funds? How many? Is everything left to customer/user discretion? Or get yet another expert subscription on top of PI — like a fee only advisor, or PMS?
And if one has a decent portfolio already should they exit PI altogether?
Please don’t get me wrong — I am not blaming PI for doing any of this, I am just tying to make sense of it all as a low/mid net worth retail investor.
We understand your point.
To explain, we do not say that one should invest in every fund we recommend. Since we are a recommendation platform, we need to provide a variety of recommendations that cover different use cases. This is also why we give the suitability separately so that one can take a call on whether or not to invest. Recommendations are also made to highlight new opportunities, since there are several subscribers who want to know of such options; not everyone will want to maintain only a small set of funds.
You can use our platform to maintain your portfolio, especially if you have active funds, since performance in these funds can always change. The Review Pro tool will also tell you if you have too many funds or if the asset allocation is going out of sync with what you need etc. We publish a variety of articles on the subject of markets and investments. – thanks, Bhavana
Yes, I do use Review Pro tool it’s just that I do not sync is very often and do not look at it very often either (I in genera avoid looking at my portfolio too often, maybe I should).
I was waiting for the, long awaited, stock import option (which I think there’s no ETA on) so that I could make PI as the one place where I track all of it – away from Kuvera (very buggy now) and VRO (I could never “get” this place).
And I understand as a research and recommendation platform you have to do that – I was just thinking from the perspective of where should I stay. e.g (just an example; not seeking personal reco here) I am invested in ICICI Hybrid Aggressive and HDFC Bal Adv was recommended and I was not sure whether I should stay or move or get into both (increasing my portfolio size by one more). That kind of dilemma. That’s where I was coming from. Thanks for your response.
Is this fund not recommended a couple of months before? May I know why is the recommendation republished today (15 Sep?)
No, we have not published a detailed report on this fund. We had added it in Prime Funds during the June quarter review, and we had given a brief rationale for this addition in the review report we wrote at that time. We have published this reco today to give a deeper explanation. – thanks, Bhavana
Noted, thank you
Would it be possible to indicate the percentage of holding as of Aug 25 that WOC Special Opportunities has in companies offering ‘special opportunities
That would be difficult to pinpoint exactly, since the fund does not disclose any such break up. We use our own judgement based on the stock and sector choices to know the nature of special situations the fund may take. – thanks, Bhavana