It started off as a middle-of-the-road performer and began to take on the competition since 2006.
Savvy sector selection is probably the reason for the above average returns. Betting heavily on Engineering and Services proved fruitful in 2006. In 2007, it capitalised on the rally in Metals, Financial and Engineering. And, in 2008, it fled to FMCG and Healthcare. Now the fund manager is focussing on Construction, Capital Goods, Power and Cement.
The portfolio is churned quite frequently with nearly 40 per cent of the stocks making an appearance for less than six months. Stocks that have been held for long durations like Thermax (69 months), Marico (56 months) and Voltas (47 months) have not consistently been around.
Nevertheless, this fund can't be called aggressive. In fact, it avoids concentrated bets. Since 2005, no sector has breached the 20 per cent mark (though this is quite a high limit), but no single stock has crossed an allocation of 6 per cent. “In the mid-cap space, liquidity could be an issue so we try to limit individual stock exposure to 5 per cent. As for sector allocations, in order to maintain diversification, we ensure that we are not too divergent from the benchmark,” says Mahesh Patil, Co-head, Equity, Birla Sun Life Mutual Fund.
As a result, you can often find the portfolio packed with stocks, sometimes as high as 65. “That could be also a result of portfolio transition,” says Patil. “Whenever one shifts between themes (say defensive to growth), it takes time to offload stocks hence during the transition phase the number rises.”
What's interesting is the fund manager's flexibility. At the end of 2008, he was heavily into debt. Which he totally offloaded early 2009 to significantly move into cash. Just before this year's rally, his large-cap allocation stood at 25 per cent in February (that is the maximum limit his fund has on large-caps) to drop to 1 per cent in just two months.
During market rallies, this fund does make its mark. Yet, during downturns, it will not dramatically stray from the category average. But its appeal lies in the fact that over the long run, it rewards its investors. In the 3-year and 5-year periods as of July 31, 2009, the fund returned 19 per cent (category average: 9%) and 30 per cent (category average: 24%), respectively.