What: An equity fund investing across market capitalizations
Why: Ability to generate market-plus returns, by deftly adjusting of sector weights
Whom: High-risk investors with a 5-year plus timeframe
Aditya Birla Sun Life Equity Fund-Growth, a multi-cap fund, has established itself in the top quartile of its category in the past few years. Its 3-year and 5-year return are 2 to 6 percentage points higher than the BSE 200 TRI, its benchmark. Even against the tougher Nifty 500 TRI – a valid benchmark since the fund invests across market caps – the fund scores well.
Strategy and suitability
Aditya Birla Sun Life Equity Fund (ABSL Equity) has a strategy of identifying sector trends and based on that, lift and drop weights to different sectors relative to the index. The fund has been adept at this shifting of sector weights.
For example, it dropped weights to the auto sector in 2017 and the sector undershot the Nifty 500. It had an equal to overweight exposure to the sector in 2016, when the sector was doing well. Similarly, it added to media in 2016, when the sector was doing well and cut back in 2017 as performance dropped.
ABSL Equity was among the few funds to go overweight on metals in mid 2016; the sector has rallied sharply in 2017. It added software last year, which is paying off now. It has been severely underweight in energy – while the sector did well for most of 2016 and 2017, it has sharply corrected this year. Within each sector, the fund then focuses on stocks that are sound and can grow well.
This strategy can, however, be risky since a sector call going awry would hurt returns much more than a few stocks underperforming. The fund can also take contrarian calls – its focus on metals in 2016 is an example. It also has a good exposure to pharmaceuticals. While some stock calls in this sector did pay off, such as Dishman Pharma, others failed to deliver.
In the present market climate, a strategy that focuses more on adjusting sector weights could work well. Several stocks have run ahead of fundamentals. Markets in the past few years have also had the tendency to gloss over fundamental strength as well as quickly picking up or cutting down stocks based on sentiment. Conventional stock picking metrics based on valuations, earnings visibility, growth prospects, and so on, have seen many funds struggling to beat the market. Therefore, a strategy based on predicting which sectors would do well in the market and opportunistically adjusting weights to these sectors can balance out the more stock-focused strategies.
ABSL Equity serves as a good portfolio diversifier. It can be an addition to a core portfolio consisting of funds following a long-term stock-picking strategy. However, given the higher volatility and the opportunistic nature of its strategy, the fund requires investors to have a higher risk appetite and a long-term horizon.
ABSL Equity has been an outperformer for the past 4-5 years. It had gone through a phase of underperformance in earlier years, and saw fund managers change in 2012. Its 3 and 5 year returns are above the average of other multicap funds by a margin of 3-4 percentage points.
Its recent returns are below the Nifty 500 TRI, as top stocks such as ICICI Bank and ITC have lagged the market. Other smaller weights such as Century Textiles and Vedanta have been recent underperformers. However, the fund is otherwise a consistent performer, especially over the longer term. Rolling 1-year returns for the past three years has the fund beating the Nifty 500 TRI and its multicap peers 75% of the time.
Rolling 3-year returns for a longer 5-year period has the fund beating the Nifty 500 TRI and peer average 90% of the time. The margin of this outperformance over the Nifty 500 TRI is a good 5 percentage points. Average outperformance over the category is also sound at over 3 percentage points.
On other performance metrics too, ABSL Equity scores well. Its risk-adjusted returns (measured by Sharpe) are above average and on par with funds such as Kotak Standard Multicap, Franklin India Equity and Mirae Asset India Equity. ABSL Equity’s upside capture ratio, which measures how much of an index’s gains a fund captures, is also in the top quartile of funds in its category. That is, the fund is among the best in being able to outstrip the market during upturns.
Given its strategy the fund is more volatile than peers. This apart, though it is able to contain losses during corrective phases, it does not match up to many peers. Funds such as Franklin India Equity, Kotak Standard Multicap, or Motilal Oswal Multicap 35 have better downside captures than ABSL Equity.
ABSL Equity maintains a large portfolio of over 60 stocks. Apart from the two or three, individual stock weights are not high. In market capitalisation, the fund has leaned more on the large-cap segment. Using SEBI’s defined market-cap cut-offs, the fund has maintained about 60% in large-caps on an average in the past two years.
The fund is currently betting on financials, with a mix of private sector banks and NBFCs. While the fund does have public sector banks such as PNB and Bank of Baroda in its portfolio, allocations here are small. Other bets include consumer goods, with stocks such as Hindustan Unilever, Dabur India, and ITC forming a good part of this exposure. While ITC is yet to deliver, the other two stocks have delivered well. Pharmaceuticals and telecom are contrarian bets.
The fund has an AUM of Rs 9,376 crore. The fund is classified under the multi-cap category in the new categorization. Earlier too, the fund was already a multi-cap fund and therefore should not see a change in strategy. Anil Shah is the fund’s manager.
FundsIndia’s Research team has, to the best of its ability, taken into account various factors – both quantitative measures and qualitative assessments, in an unbiased manner, while choosing the fund(s) mentioned above. However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts’ expectations about future events. They should not, therefore, be the sole basis for investment decisions. To know how to read our weekly fund reviews, please click here.