Investment Strategy
Birla Sun Life Frontline Equity is an open-ended diversified large-cap Indian equity fund, launched in August 2002. The fund invests at least 70% of its assets in large-cap stocks and the rest in mid-small cap stocks to generate alpha (excess return). The fund adopts bottom-up investment approach and invests across various industries and sectors forming the BSE 200 index, the benchmark for the fund. It strives to align with the benchmark’s sectors weight with 25% variation on the up/down side.
The fund limits active bets (fund weight minus benchmark weight) to the extent of 5% of its assets in case of large-cap stocks, while for small/mid-caps, the active bets are restricted to 2-3%.
The fund manager expects number of holdings in the fund to be in the range of 40-55 at all times with maximum stock weight of 4-5%. There is no minimum stock weight criterion, however, the fund manager believes he would like to own at least 1% of fund’s assets.
Management Team
Mahesh Patil, with 16 years of experience in the investment management field, manages the Birla Sun Life Frontline Equity since October 2006. The fund manager is supported by 12 research analysts (overall), each covering either one large sector or two-three small sectors. Each research analyst covers 30-40 stocks, which we believe is a manageable stock coverage for an analyst.
The investment research team tracks approx 330 stocks to identify investment opportunities. These stocks are tracked on a quarterly basis with research analyst’ note post the quarterly company earnings are out. The team also conducts company meetings every six month. The stock ideas generated by research analysts are reviewed by fund manager, who is responsible for final buy/sell decisions for the fund.
We liked the investment process followed by the fund management team as there are various internal investment systems and risk controls in place, which could help for the fund's outperformance.
Performance Analysis
The fund has delivered strong relative performance since its August 2002 inception through the end of April 2009. Since inception, the fund outperformed the benchmark by delivering 26.4% return, compared with the benchmark return (BSE 200) of 20.9%.
The fund featured in the top quartile by registering 18.2% return during the five-year period, driven by strong sector selection, particularly industrials and capital goods sectors. The fund also benefited from security selection in the banking sector. In comparison, the category peers posted average return of 14.9%, while BSE 200 index gave 12.1% return. The fund was rated four stars by Morningstar during the period.
The fund not only outperformed peers during the bull market period, but also delivered strong outperformance during the bear market scenario as the fund manager moved from mid-caps to large-caps to protect downside. During the last one-year period, the fund posted -28.9% return, compared with BSE 200, which declined by 37.9%. The large-cap category peers registered -33.8% return during the period.
Portfolio Analysis
The fund benefited from high exposure to the industrials sector between mid 2006 and December 2007, owing to increased infrastructure activity, driven by strong corporate and government spending. The fund manager’s cautious approach to cut exposure in early 2008, owing to global economic slowdown and capital funding issues, also protected the fund’s downside. The fund still holds 10% of its corpus with exposure to Bharat Heavy Electricals and Crompton Greaves, driven by their strong fundamentals.
The fund manager had low double digit exposure to the financials sector since mid 2006 and increased thereafter in April 2007 to high double digit as he believes India has a robust banking system and private sector banks like ICICI Bank, Axis Bank and HDFC Bank and public sector banks like State Bank of India are likely to perform well. The financials sector accounted for highest exposure in the fund’s portfolio. We believe the higher exposure to this sector is likely to dampen the fund’s performance in a rising interest rates scenario.
The fund manager increased the fund’s exposure to the energy sector to double-digit level in March 2008, which contributed to its performance, driven by an increase in oil and natural gas prices. The energy sector had the second largest exposure in the fund’s portfolio with Reliance Industries as the largest holding. We believe, the fund, is exposed to high risk in the event of a sharp decline in oil and gas prices.
The fund manager increased the fund’s allocation to the information technology sector since January 2009 as he believes the market has discounted negative outlook for the sector. He increased holdings in Infosys Technologies as the stock’s valuation was lower than market valuation and the company has sound free cash flow and offers better return on capital employed.
The fund’s assets size was Rs 481 crore at the end of the April 2009. The fund’s total expense ratio was at 2.31%, higher than the category average of 2.01%. The mutual fund needs to lower down the fund’s expenses as higher costs may put the fund at a disadvantage, compared with its peers.
