Why ‘special situation’ funds have nothing special for investors

Three funds in India follow a special situation theme with overall assets AUM of almost  ₹9,400 crore.
Three funds in India follow a special situation theme with overall assets AUM of almost 9,400 crore.


The portfolio of a scheme with this theme is akin to that offered by a diversified fund of the same AMC.

A special situation, in investing terms, is typically referred to an event resulting in either corporate restructuring that changes the fundamentals of the business model or a change in the ownership of the shareholders.

Benjamin Graham, known as the father of value investing and the author of Security Analysis, classified corporate events including mergers, the sale and liquidation of a business unit, litigated matters against the company, and demergers as special situations. These special situations offer good buying opportunities to investors.

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Neil Bahal, founder & CEO of Negen Capital, said in an interview to Mint in October 2022 that special situations investing is an advanced form of value investing. He cites the example of US-based Berkshire Hathaway, which was a failing textile business before Warren Buffett took over the company. “Buffett’s takeover of the business, at $14 per share, changed the DNA of the company. It got into chocolates, furniture, and even insurance. The business changed direction completely and this is what you called a special situation where some event happens and changes the DNA of the business," added Bahal.

Special situation funds typically invest in companies with corporate events including M&A, delisting and buyback
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Special situation funds typically invest in companies with corporate events including M&A, delisting and buyback

Yet, special situations investing is also a very high-risk investment strategy and has serious implications if the investor’s call goes wrong.

There are three funds in India that follow a special situation theme with overall assets under management (AUM) of almost 9,400 crore—ICICI Pru India Opportunities Fund, Axis Special Situations Fund and Aditya Birla Sun Life Special Opportunities Fund . These funds, however, follow a broader mandate to pick stocks not just based on corporate actions but also opportunities provided by sector and economy-related trends. Thus, these schemes, which have invested in about 44 to 72 stocks, have a diversified portfolio unlike a typical special situation fund, which usually holds a concentrated portfolio.

An interesting observation is that the portfolio of each of these three funds is more or less similar to an existing fund offered by the same asset management company (AMC).

ICICI Pru India Opportunities Fund

Launched in January 2019, this fund is the oldest of the lot with a mandate to invest in three types of special situations —temporary crises in a company, sector or economy; regulatory changes; global events—offering good buying opportunities.

In the three-year period, the fund has delivered a good 26% CAGR (compounded annual growth rate), aided by value investing style that is favoured by the market currently.

A closer look at the portfolio, however, reveals that this fund resembles the AMC’s Value Discovery Fund, run by the same fund manager— Sankaran Naren. Both the funds have in common about 32 stocks, which account for 82% of the India Opportunities fund portfolio, as of November 2022.

Bharat Pareek, product head- private wealth management, ICICI Securities, said, “both value discovery and India opportunities funds have made similar changes to their portfolios over the last one year. The latter was recommended to clients as value pick and not as a special situation fund."

ABSL Special Opportunities Fund

Aditya Birla Sun Life Mutual Fund merged its erstwhile Special Situations Fund, a diversified equity scheme into Aditya Birla Sun Life Equity Fund in April 2018 in accordance with a directive by market regulator Sebi on the categorization of mutual fund schemes. On 23 October 2020, the fund house launched the ABSL Special Opportunities Fund.

Just like ICICI’s fund, this scheme too scouts for opportunities not limited to company-specific events.

Mahesh Patil, chief investment officer of the fund house, explained how they find opportunities for this fund from sector changes such as growth in the chemical sector, which is aided by ‘China Plus One’ strategy. He also explained the strategy of finding value in a company-specific event, citing the example of an investment by the fund in a electrical company which demerged one of itsbusinessunits recently. He declined to name the firm, citing the fund’s policy. The fund is titled towards the large-cap segment and has 38 stocks in common with the Aditya Birla Flexi Cap Fund, which has also significantly invested in blue-chip companies. The 38 stocks constitute 76% of the portfolio of the Special Opportunities Fund.

Axis Special Situations Fund

Axis Mutual Fund, known for its growth style of investing, introduced the Special Situations fund with focus on companies that disrupt business models and also others in such an ecosystem.

“We are trying to find out companies which are probably the highest growth in their own sectors. Also, a lot of times, the valuation of these funds may not be on the lower side," said Ashish Naik, fund manager. The portfolio of this fund, with holdings such as Zomato and InfoEdge, reflects the same.

Axis Special Situations Fund is the only scheme in this category with international exposure (about 27%, as of November 2022), which is advised by UK-based Schroder Investment Management which also focuses on the disruption philosophy.

This fund, however, is similare to the Axis Growth Opportunities Fund, in the large & mid-cap category. This fund also does overseas investments with advice from Schroder. Out of the 73 stocks held by Axis Special Situations Fund, there are 35 stocks (61% of the portfolio) in common with the Growth Opportunities fund.

Are these relevant now?

Santosh Joseph, who is a AMFI registered mutual fund distributor, sees no relevance for special situation funds currently. “Most diversified funds with a multi cap Flexi cap or large cap will capture bulk of that in their existing portfolio," he added.

Koushik Mohan, who used to manage the special situations fund at MOAT PMS until a few months ago, strongly believes that mutual funds can deploy the current investing style in any of their diversified fund such as a value or a contra fund.

“The portfolios of all three special situation funds are a bit inclined towards large-caps. I believe that true value in special situation funds will be created from the mid- and small-cap space," said Rushabh Desai, a Mumbai-based mutual fund distributor.

Desai, who is also a founder of Rupee with Rushabh Investment Services, said “Investors can surely live without special situations category. Any fund manager of Flexi cap strategy funds can take the same advantage and churn the portfolios as per the dynamic nature of the markets."

Investors should note that there are a couple of special situation funds in the PMS (portfolio management services) space that follow the investment strategy truer to their names (see table).

Vishal Dhawan, founder & CEO of Plan Ahead Wealth Advisors, highlighted that special situation funds in the PMS space may open up only tactically when such opportunities exist to be taken advantage of. He gave the example of Unifi PMS, which has a ‘Spin-Off’ fund that focuses on demergers, and said this fund no longer accepts capital as the opportunities under this category may be limited.

Mohan, who is now a lead analyst at Ashika institutional Equity, cautions investors to be patient when invested in a truly special situation fund as sometimes it could take a prolonged period of time before the shareholder witnesses the benefit of ‘value unlocking’ by such companies.

Should you invest in these?

There is nothing special about the special situation mutual funds in India. The benefit of investing in these schemes can be achieved by allocating your funds to any well-managed diversified mutual fund scheme in India.

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