Mutual Fund - DWS Investment Opportunity Fund : Analysis

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Investors in the DWS Investment Opportunity Fund can retain their units in the fund, given its strong performance since launch. With a compounded annual return of about 45 per cent since launch, the fund has kept comfortably ahead of its benchmark BSE-200 as well its peer group of diversified equity funds.

A one-year return of about 80 per cent makes the fund a top performer within the diversified category for the past year. Since its inception, the fund has been among the better options within the universe of flexicap funds (funds which can invest across the market capitalisation range).

A compact size, that has enabled the fund manager to shift nimbly between large-cap and mid-cap stocks, good stock selection and active churning of the portfolio have helped the good performance.

Suitability: The fund's risk profile would be akin to that of a normal diversified equity fund. Unlike other funds labelled as "Opportunities" products, DWS Investment Opportunity does not hold concentrated exposures in its top sectors.

Instead, the fund's mandate allows it to dynamically allocate its portfolio between equity and other assets; equity exposure in the portfolio can decline as low as 5 per cent.

This requires timing skills and can add an additional layer of risk to the fund. In practice, though, the fund has remained fully invested in recent times and hasn't taken recourse to timing calls. However, it has been quite aggressively managed in active churning of the portfolio and a flexible allocation to mid-cap stocks.

Performance: The fund has managed a one-year return of 85 per cent, with a three-year CAGR of 55 per cent. The fund is among the few flexicap funds to figure among the top performers for the past year. This is probably explained by its well-timed move into mid-cap stocks, with a bias towards capital goods, metals and banks in the past six months.

As a proportion of the overall portfolio, the mid-cap exposure (stocks with market cap of Rs 7,500 crore or less) has climbed from 34 per cent to 56 per cent over the six months to December. Over the past quarter, for example, large-cap names such as Tata Power, ITC, and Grasim were shed in favour of new adds such as Marg Construction, HCC and Gujarat Industries Power.

These moves are likely to have helped performance, given the narrowing valuation gap between mid-caps and large-caps in recent months. The portfolio also appears to be quite actively churned, with 21 of the total of 39 stocks held in the portfolio replaced in a six month time frame.

An active profit-booking strategy has probably been necessary in this period, given the sharp run-ups in select mid-cap stocks. A small asset base has proved an advantage, both in terms of manoeuvrability of the portfolio and quick switches into promising mid-cap ideas.