VR Logo

A Worthy Bet

Birla Sun Life Dividend Yield Plus' downside protection capabilities work in its favour…

Strategy
The fund invests in fundamentally sound companies with a dividend yield at least twice the Sensex yield. Dividend paying companies usually have healthy free cash flows, steady earnings growth and a strong balance sheet. This results in steady stock returns over the long term while providing relatively better downside protection in times of market correction. The strategy of investing in a dividend yield stock at times becomes contrarian, as undervalued or out-of-favour stocks also offer higher dividend yield.
The fund also has the flexibility to invest up to 35 per cent in companies facing special situations like de-mergers, buy-backs and open offers, which is used very selectively with a focus on minimising the downside risk.

Our View
This fund has substantial exposure to mid-cap stocks (less than Rs7,000-crore market cap). But this has not translated into fabulous out performance even in bull runs led by smaller market cap stocks. But last year it did put up a good show and had held its ground in 2008. Even in the current market turbulence, it has fallen less than the average fall of its peers. During periods of volatility, the fund increases its debt allocation, which was as high as 20 per cent in November 2008.

The Verdict
Its downside protection capabilities have proved that the fund gains ground by not losing it in the first place. One would expect this trait from a dividend yield fund, but it’s surprising when one considers the high mid- and small-cap allocation. The risky bent is balanced by avoiding aggressive bets and increasing the number of stocks over time. Historically, the fund has not been a bull-market standout. But over the long term it proves to be a worthy bet.

Portfolio Insight
• The top sectors are Banking, Consumer Non-durables, Software and Pharmaceuticals; sectors that led the last rally helped the fund participate in the upswing over the last 18 months.
• The fund maintains around 50 per cent exposure to mid caps and about 20 per cent to small caps stocks, making it fairly representative of this category. The low large cap exposure is limited to a few stocks.
• True to its valuation-based mandate, this fund manages to contain downsides quite well, when compared to some of its peers, during market corrections.
• On a stock-specific basis, the fund limits exposure to individual stocks to less than 5 per cent of the portfolio.
• Seven fund managers in a short span speaks for itself on fund management with Nishit Dholakia, the current fund manager taking charge as recently as January 27, 2011.