BEATING THE ODDS

Having performed in line with its beta during favourable market conditions, Birla Sunlife Frontline Equity Fund eventually stood out by proving its ability to beat the hurdles in the downturn

 LAUNCHED in August 2002, Birla Sun Life Frontline Equity is second in line to another equity diversified scheme from the same fund house — Birla Sun Life Equity Fund, but only in terms of year of launch and size. Managing assets worth Rs 481 crore (its highest till date), Frontline Equity has overtaken its gigantic sibling — which is nearly double its size at Rs 793 crore — in terms of performance. While both the funds are being managed by the same fund manager, Frontline Equity has indeed taken the frontline in the Birla Sun Life basket.

PERFORMANCE:

This fund started off as an average performer. But surprisingly, it has done a big turnaround in the past one year when the markets have been in mess. It was interesting to see a fund, which was performing almost on par with the indices until 2007, outperform them with good margins in 2008. The fund’s returns of – 48% against -52% of the Sensex and the Nifty and -55% (on an average) of the others in the equity diversified category has given it an edge over many others in that year.

   While the fund has managed to perform in line with its beta in favourable market conditions, it ability to protect its returns in a downturn has come as a bit of a surprise. It has a high beta of 0.89 which implies that for a gain of every rupee in the indices, the fund’s portfolio will return Re 0.89 and vice-versa. However, in the past one year, while the major indices — the Sensex and the Nifty — declined by about -13% and -12% respectively, trailing returns of Frontline Equity stood at just about -4%. High cash calls can be construed as one of the reasons for the fund’s brisk risk management.

   The fund’s improved performance was also reflected in its ranking in the ET Quarterly MF Tracker where it rose in the rankings. From being a consistent average performer (Silver) till June 2008, it was upgraded to Gold in September 2008 and ultimately to Platinum by the end of the calendar year. It has also managed to retain its Platinum grade for the consecutive quarter ended March 2009.

PORTFOLIO:

Benchmarked to BSE 200, Frontline Equity is a large cap-oriented fund with very little exposure to mid-caps and negligible exposure to small-cap stocks. While the fund has always had a large-cap bias, it has drastically shrunk its exposure to mid-caps since February 2008. While this strategy has saved the fund from the perils that have hit the mid-caps in the past year-and-a-half, it may need reconsideration in the current market scenario which, according to experts, is likely to favour mid-caps.

   The fund had been sitting on excess cash till March 2009, which was brought down last month. From an average of about 8%, the fund had increased its cash levels of more than 20% since March 2008. However, with the revival in the equity markets, the fund has once started to deploy cash, though not aggressively, and was sitting on 16% cash by the end of April 2009. 

   Frontline Equity has always had a bias towards the banking and finance sector and its current exposure to this sector alone stands at about 18%. However, energy currently occupies the highest share in the portfolio — about 24% — and within this space, the fund has shown an inclination towards power generation, transmission and equipment, whose share has nearly doubled from about 5% till March 2009 to more than 10% in April 2009.

   The fund holds about 40-50 stocks, on an average, which makes it reasonably diversified. However, its top 10 holdings alone account for 44% of the total equity holding, with banks accounting for almost one-fourth of this pie.

OUR VIEW:

In an era where the funds are racing to beat the indices by huge margins, the fund has done only fairly well by generating returns almost at par with the indices. However, the unique selling point of this fund has emerged in the past one year by the manner in which it has managed to mitigate its risk in the downturn — a feat achieved by very few funds. But with the tide turning again, it would be interesting to watch how fund manager Mahesh Patil manages to take this fund through the next level.