Innovation has always been a buzzword in the business world. Innovation, though not rated as highly as invention, is still pretty lucrative. It drives change, challenges the status quo, and compels businesses to continuously adapt and evolve to stay competitive. Innovators challenge existing markets or create entirely new categories, gain market share through technological and process advancements.
There are numerous stories of innovation that helped businesses grow at a different trajectory, much sharper than its peers.
In this backdrop, SBI Innovative Opportunities Fund has been launched recently and is open until August 12. The fund is benchmarked against the Nifty 500 Index.
Currently, fund houses such as Axis, Bandhan, Baroda BNP Paribas, ICICI Prudential, Nippon India and UTI have schemes providing exposure to the innovation theme.
Investment Strategy
SBI Innovative Opportunities Fund outlines its investment strategy to invest in companies which seek to benefit from adoption of innovative strategies and themes, and proposes to invest in companies that qualify under any of the following broad ideas.
Product/ Service Innovators — Companies that develop new products or services, or significantly invest in R&D for new innovations.
Process Innovators — Companies that innovate new processes, potentially disrupting existing business models.
Innovation Adaptors — Companies that adapt to innovative business models, products or services within their industry, showing agility in response to emergent trends.
The fund is proposed to have a concentrated portfolio of 35-40 stocks, following a bottom-up stock selection process. The scheme will invest across sectors and market caps.
Comparison
Since all the funds except for Axis Innovation Fund were launched in the recent past and do not have a track record of more than 15 months, we have compared the schemes’ returns with the benchmark from the launch of the fund.
While ICICI Prudential Innovation Fund and Nippon India Innovation Fund have managed to beat the benchmark, UTI Innovation Fund has underperformed. And although Baroda BNP Paribas Innovation Fund and Bandhan Innovation Fund could boast of index-beating returns, both the schemes, launched only in April, it is not a meaningful time horizon to make a comparison.
Kotak Innovation Fund, which was launched in December 2020, is the only fund which has a comparable track record of around 3.5 years in this peer-set, and it has failed to beat the benchmark index on an absolute basis. Even on the basis of three-year rolling returns, calculated since its inception, the fund has delivered 15.6 per cent against 19.5 per cent clocked by Nifty 500 TRI and has underperformed the benchmark Nifty 500 TRI, 100 per cent of the time.
On an average, in the last 12 months (between July 2024 and June 2023) or since inception of the fund, whichever is earlier, there was a large-cap bias across ICICI Pru Innovation Fund (48.6 per cent), Baroda BNP Paribas (38.7 per cent), Nippon India (38.6 per cent) and Axis (37.3 per cent). Bandhan had relatively equal exposure across market-caps, while UTI Innovation Fund was theoretically riskier, with 80.1 per cent exposure to mid- and small-cap segments.
Our take
The SBI Innovative Opportunities Fund aims to find companies with strong competitive advantage, long runway for growth, potential for generating strong RoE and cashflows. In the current elevated markets, this may not be an easy task.
Except for a couple of exceptions, active funds in this space, as explained above, have found it tough to generate alpha returns. With thematic funds emerging as the largest category of equity and equity-oriented funds, in terms of AUM, as per the latest AMFI Monthly Note (June 2024), it is quite possible that the quality lot of the companies are trading at hefty premiums.
Investors could wait and watch for the allocation strategy of SBI Special Opportunities Fund before jumping onboard.
Although, this fund might be suitable for high-risk investors looking for concentrated bets, it is a high risk and unknown rewards scenario.