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Sound Proposition

Birla Sun Life Frontline Equity has underperformed its benchmark in only one of its eight years of existence

Last year’s performance was not spectacular and this year it finds itself in a very average spot. But don’t write this fund off. When compared with the benchmark, it had just one annual underperformance (2003) in eight years. From a relative point of view, it began to beat the category average only from 2006, a result of Patil taking over the fund in November 2005.

Though the stock selection is flexible, the strategy is to target the same sector weights as found in the benchmark (BSE 200). There is also some leeway though; either ± 25 per cent of the sector weight in the index or an absolute figure of ± 3 per cent, whichever is higher.

While Patil broadly adheres to this strategy, there have been the occasional deviations (probably due to various reasons such as stretched valuations). According to him, “occasionally, weights shift out of the bands on account of market action or in extreme scenarios like that prevailing immediately after Lehman Brothers’ bankruptcy in 2008. In such cases, our risk management and mid-office team monitor the deviation regularly and we bring it under the prescribed limits within a short time”.

Currently, Financial Services is the top sector of the fund with an allocation of close to 21 per cent (benchmark allocation: 25%). “At present we are overweight on Capital Goods through select companies that have high predictability of earnings trajectory. Since the sector is heterogeneous and each company is unique, it is a bottom-up call rather than top-down bias,” says Patil.

In 2009, good sector bets resulted in a return of 90.45 per cent (category average: 80.24%). “We got into good quality stocks at distressed valuations,” says Patil. “We bought into certain stocks when the de-leveraging story began to play out and firms were able to raise money as liquidity eased. Prior to elections, we began to reduce cash and took a call that Infrastructure is one sector that will get a thrust, irrespective of who is at the Centre. Also, we were diversified across sectors, and when the market picked up, all sectors moved up.”

The performance did not go unnoticed. Assets swelled resulting in a more diversified portfolio ranging from 54 to 62 stocks (up from 35 in January 2009). Since 2008, apart from RIL, Bharti Airtel and Infosys Technologies, no stock has accounted for more than 5 per cent of the portfolio, while concentration of Top 5 stocks has dropped to around 20 per cent.

Higher than average returns, lower risk and a well diversified portfolio makes it a sound proposition.