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Using GARP to Evaluate Opportunities

Companies with corporate governance issues never form a part of our portfolio, says Mahesh Patil, fund manager, Birla Sun Life Frontline Equity

Mahesh Patil, fund manager, Birla Sun Life Frontline Equity, talks about the investment strategy of the fund and gives his insights on what has made it perform consistently over the past few years.

Using GARP to Evaluate Opportunities Mahesh Patil, fund manager, Birla Sun Life Frontline Equity

What is the Investment strategy for the fund? (Including internal rules investment universe, capitalization orientation and on maximum cash allocation)
BSL Frontline Equity Fund (FEF) is a large-cap bias fund and it seeks to maintain its sectoral weightage within a tight range of the sectoral allocation of its benchmark index (BSE 200). The range is +/- 25% relative to benchmark allocations or 3% absolute, whichever is higher. However, the manager is willing to deviate from the index in individual stock holdings. FEF also generally seeks to maintain at maximum upto 10% cash under normal circumstances, though the SID allows it upto a maximum of 25% of NAV in debt & other money market instruments.

The fund's core portfolio (60-70%) will be constitute of very long-term holdings which are stable in nature, and the balance 30-40% of the portfolio will be tactical plays. The fund has a leeway of taking limited exposure to quality midcaps upto 15%. The fund will typically not take very large skewed bets and aims to beat the benchmark by a reasonable margin. The manager uses a combination of top-down and bottom-up approach for portfolio construction and follows the GARP (Growth at Reasonable Price) philosophy for evaluating investment opportunities.

What are the essential attributes for the stocks to be in our portfolio?
Before investing in any stock the following important parameter are considered:

  • Nature of business / competitive advantage
  • Scalability of business model and growth potential
  • Management - Consistency & approach to minority shareholders
  • Favourable return ratios
  • Attractive/reasonable valuations.

Equity analysts / fund managers are individually responsible for tracking various sectors. The analysts keep tracks of developments happening in respective sectors and are responsible for generating investment ideas within the same. They are in regular touch with the managements of the companies under their coverage. The fund manager can buy only those stocks that are part of approved investment universe.

BSL Frontline equity is a large-cap focused fund, thus essentially includes companies which are large in size based on market capitalization. As discussed above large sized midcaps with high quality are also considered for inclusion in portfolio.

What kind of stocks never enters your portfolio?
Fund manager does not include small cap stocks in BSL frontline equity portfolio. Apart from the same, companies that have corporate governance issues, never form part of the portfolio.

What will you attribute the relative consistent performance of your fund in recent years?
Fund's consistent superior performance is attributed to exposure discipline to sectors and stocks that it follows based on rules set out in the investment strategy. Another factor which has led to consistent superior performance is rational and disciplined approach to selling decisions. Stocks are sold from the portfolio when

  • the price target is achieved; or
  • there is a change in business fundamentals that leaves inadequate return potential on the table; or
  • any new attractive opportunity is identified; or
  • stock or sector weight needs to be re-aligned to conform to exposure norms

Any tactical miss you regret (not having, or not having enough or holding something) in your portfolio?
For any portfolio not having enough quantity of stocks which have done well for the portfolio i.e. mistake of omissions is a tactical miss that we too regret. Following are the stocks which have contributed to the superior performance of the portfolio which we believe with excess quantity could have added more value:

Please click here to read the analysis of this fund.