This time, we did not compare peers but went for siblings. So we picked two diversified equity funds from the Birla Sun Life Mutual Fund stable: Birla Advantage and Birla Sun Life Frontline Equity.
When you have two such funds from the very same fund house, you cannot expect a radical distinction in style. The fund manager may differ, but the team conducting the research is identical and a common investing philosophy will permeate all investment decisions.
Which makes us wonder why a fund house would introduce two similar diversified equity funds? The answer lies in the fact that Frontline was earlier a fund with Alliance Mutual Fund and all the funds were acquired by Birla Mutual Fund two years ago. Hence, the two funds co-exist in the Birla Mutual Fund portfolio.
From its days of glory when it was a 5-star rated fund and the best performer for two consecutive years to a 1-star and one of the worst performers, Advantage has certainly done the rounds. But to provide a fair comparison, we have only looked at portfolios and returns of both the funds from September 2002. Frankly these funds posed to be quite a conundrum. While the fund house seems to be very clear on their positioning, the data shows them to be overlapping into each other's style and poaching on one another's identity.
The fund house is clear that Frontline is the more aggressive offering. And maybe that was the case initially. But now it does not appear to be so. We found that Advantage churns its portfolio more often. For instance, 52 of Advantage's holdings were held for a minimum period of just three months. But the corresponding figure for Frontline was just around 32. As a result of the frequent churning, Advantage invested in around 165 stocks over the entire period while Frontline had just 130 in the same period.
So if we take this as aggression, then Advantage takes a backseat to Frontline. We added a few more parameters to this. We looked at the number of stocks in the portfolio. A very conservative fund manager would go for diversification while an aggressive one would go for a focussed portfolio with bigger bets.
Here too, on both parameters, Advantage emerges as the more aggressive player (see box: Who is more aggressive?). A look at Bharti Airtel will bring more clarity. This stock was the top-most holding in both portfolios in July 2007. Yet, Advantage has allocated 7.4 per cent to it while Frontline, 5.6 per cent. The top three holdings in Frontline account for 14.28 per cent of the portfolio, but it amounts to 20.28 per cent for Advantage.
But what was amazing was that this was not the case earlier where Frontline emerged as the one with the more concentrated bets. Over the past year, it looks like there has been a change in their style.
So as far as style goes, Frontline seems to be adopting a more cautious approach and shedding its aggression. And, funnily, this change in strategy is paying off. From 2003 to 2005, Advantage beat Frontline in returns. Last year, the tables turned and Frontline thrashed Advantage on the performance front.
Both the funds have been category underperformers since 2002 with Frontline doing even worse than Advantage. But in 2006, Frontline beat both.
Of course, the cash allocation helped. Frontline has consistently maintained a higher cash allocation than Advantage (see box: Who is more aggressive?). In fact, in May 2006 when the market tanked, its cash allocation hit 22.68 per cent. And, it paid off handsomely. The average category return that quarter (April-June 2006), was -13.60 per cent with Advantage going to -16.07 per cent. Frontline survived with a dip of just (-) 7.25 per cent.
Last year, Frontline also got very lucky with some of its bets - Kirloskar Oil Engines, Crompton Greaves, Siemens - and its increased exposure to Basic/Engineering and Construction helped.
As far as stock selection goes, Frontline can take some bets which seem more risky. Advantage never ventured into the relatively new sectors of real estate or aviation except for Sobha Developers. But Frontline did - it invested in Parsvnath Developers, Sobha Developers, Ansal Properties & Infrastructure and Jet Airways. But each stock appeared just once in the portfolio. By the way, Sobha Developers appeared in the December 2006 portfolios of both funds. Like we said earlier, Advantage did have its place in the sun before dropping to abysmal levels. But over the past few years it has picked up in performance and may well continue on its journey to being a 5-star fund once again. Yet, for now, Frontline appears to be a better bet when looked at in totality.
(The analysis and comparison of portfolios has been done from September 2002 to July 2007.)
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