Why this large-cap fund gets a Gold

Thanks to a skilled manager and a well-executed investment approach, Aditya Birla Sun Life Frontline Equity Fund is a compelling choice.

Fund manager Mahesh Patil considers the fund house’s investment universe and the IISL Nifty 50 Index when constructing the portfolio.

Typically, he invests in companies that display strong earnings growth potential, while focusing on parameters such as ROE and ROCE. He makes use of relative valuation measures, such as P/E, P/BV, and EV/EBITDA vis-a-vis comparable peers when selecting stocks. That said, he isn’t valuation-conscious in the strictest sense. Although he looks at valuations closely, Patil is willing to be flexible if he is convinced of the growth prospects.

He has used short-term tactical plays to good effect on several occasions. He is not averse to increasing and reducing his allocation to the same stocks routinely based on price momentum and valuations.

This pattern is perceptible in his long-held investments as well. Given that sector weights are aligned loosely to those of the benchmark index, the top-down approach is less significant than the bottom-up approach but isn’t ignored. Patil studies macro factors such as the domestic interest rate cycle, government policies, and developments in the global economy to determine sector over- and underweightings. In our opinion, the investment strategy is uncomplicated but it acquires an edge thanks to Patil’s execution.

The fund’s strategy leads to a significant overlap with the benchmark, but the performance profile tends to differ significantly given that the weights at the stock level are different (although within the templated range). As part of the benchmark-aligned strategy, heavyweights such as Reliance Industries, Infosys, ITC, and HDFC Bank are ever present in the portfolio, irrespective of the manager’s conviction levels. These share space with names such as Sanofi India and Crompton Greaves Consumer Electrical, NTPC, and ACC, which carry low weightings in the index.

The fund’s underexposure to Reliance Industries leads to a significant underweighting in the energy sector. The fund carries a slight overweighting in financial services and healthcare owing to off-benchmark holdings like Cholamandalam Investment and Finance, ICICI Lombard General Insurance, Sanofi India, and Torrent Pharmaceuticals, to name a few. Sector weights can range within plus or minus 25% or plus or minus 3 percentage points (whichever is higher) of benchmark's.

Broadly speaking, the portfolio has remained consistent, with large caps constituting more than 80% of the portfolio. The fund typically holds 70-85 stocks, with the manager aiming to remain fully invested. Yet it can have slightly higher cash levels based on market expectations.

The top 10 stocks account for about 50% of assets. The top holdings are Infosys, RIL, HDFC Bank, ICICI Bank, and Bharti Airtel.

Performance

The annual returns have a seen a decline; top quartile (2016), second quartile (2017), third quartile (2018) and fourth quartile (2019).

The fund typically tends to underperform in momentum-driven markets and those characterized by market rallies that turn out of favour for large-cap names

The trailing return of 1-year, 3-year and 5-year has also seen an underperformance compared to the category average. But its annualized 10-year return has been a top-quartile one at 9.49%. Its 15-year return is an extremely impressive 14.18%.

The fund has delivered a solid showing on the risk/reward front over the long haul.

Why the fund gets a Gold rating

Fund manager Mahesh Patil has been with the fund company since October 2005 and has been managing this fund since November 2005.

We think Patil is amongst the best managers in the industry. His track record suggests he is at his best running diversified strategies in the large-cap segment. He utilises his understanding of market movements and stock price points skillfully.

His presence has been a positive for the firm’s fund range as he works closely with the investment team, contributing to top-down and sector views. He has also been instrumental in contributing to the research and portfolio management infrastructure at the fund company.

Our confidence in him, his execution, and our expectations over the fund’s ability to deliver pleasing results over a market cycle leads us to assign a Morningstar Analyst Rating of Gold.

Portfolio and Performance details are available here.

Source: Morningstar India Website