Special Situations mutual funds: Identifying hidden investment opportunities

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Indian mutual fund houses are betting big on special situation funds with three schemes based on the theme getting launched in the past few months.

The three new schemes are — Kotak Special Opportunities Fund, Samco Special Opportunities Fund and WhiteOak Special Opportunities Fund.

These schemes largely focus on very specific news that has to do with that particular stock such as corporate restructuring (including mergers & acquisitions), government policy or regulatory changes, technology-led disruption and innovation, new trends, new & emerging sectors, companies or sectors going through temporary unique challenges and other similar instances.

The special situations strategy operates by identifying and capitalising on these unique events or circumstances, which can impact the value of a particular investment.

Typically, they are flexi-cap schemes, invest in stocks and sectors across marker capitalisation and benchmark themselves to the S&P BSE 500 Total Return Index.

Moneycontrol talked to Chintan Haria, Principal—Investment Strategy, ICICI Prudential Asset Management Company, about the strategy these schemes follow, why fund houses are betting on them and how to select a special situations fund.

Here are a few points that Haria highlighted:

• Special situation funds looks at factors including regulatory or management changes, which can benefit a particular stock in the long run.

• Examples of special situations include the impact of the ‘Go Green Initiative’ on oil and gas stocks, which became cheap but still made money, and the recovery of telecom stocks after a regulatory change in India.

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• Sell decisions in special situation funds are influenced by the goal of booking profits and moving on to better opportunities.

• Investor appetite is growing for special situation funds.

• Special situations investing can create alpha over 3-5 years, but may underperform in the short term.

• Haria highlighted the longevity of successful special situations investing in India, with recent examples in energy and banking.

• Special situations investing can provide good returns over 3-5 years, even in the current market conditions.

• Special situations investing can form part of long-term equity allocation, like dynamic asset allocation or multi-asset investing.

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• There is a benefit of having a larger-cap tilt in special situations funds, including flexibility and scalability.

• Investors should look for a special situations fund with a history of generating alpha over time.

• The fund should demonstrate the ability to manage risk by patiently holding onto a portfolio.