It has been over 20 months since we have launched the Birla SL Manufacturing Fund. I think it is an opportune time to provide an update. Also, I have learnt that there are unfounded concerns over the performance of the fund even after the NAV being at > INR 11.5 currently. This is not an effort to counter the concern but to present facts and figures to all.

As all of you would recollect, the fund was launched in Jan'15 when the markets were in good mood and the concept of "Make in India" was making headlines every day. Sensex and Nifty indices peaked in early months of 2015. In fact, as you read this note, those peaks have not been breached yet. In this backdrop, we think that an absolute return of 15% is credit worthy.

It was during this phase of the market peak that Birla SunLife Manufacturing Fund received the money through the NFO with a compulsion to deploy almost immediately.

Birla SunLife Manufacturing Fund started to build the portfolio slowly maintaining high cash levels and higher large cap stocks and limited mid cap stocks. It took four months for the cash level to fall below 10% still maintaining high large cap exposure. However, as the markets corrected the midcap exposure has increased in the portfolio, as seen below. 

Maneuvering through the above mentioned market scenario and looking through the rhetoric on "Make in India", the fund has been able to create alpha the broad based index - BSE500 (which is tougher to beat) across time periods. Just to clarify that if the NAV of BSE500 is taken for the same period as the fund, it would have read 9.81 today compared to fund's NAV of 11.53 (as of 29^th Sep'16)

Sectors:

We were very clear from the beginning that returns can be made in Auto, Pharma and select themes in Consumer. Also, we had apprehension on the valuation of Consumer Staples and a strong view that the investment cycle would be slow and delayed for capital goods stocks to perform.

With this view, we have built and maintained sizeable positions of 18-22% in Auto & Auto related stocks for the entire period. Maruti Suzuki, Hero MotoCorp & MRF have sizeable weights. Pharma also had high representation with a weight of 15-19%. It has been a mixed bag as FDA issues led to correction in some stocks while some bottom up picks did very well. Participation in paints, spirits and white goods has been good with positive attribution to the performance of the fund. A sector like Chemicals has done well for us as we held 5-8% weight purely based on bottom up stock picking (Tata Chemicals).

Though we had cautious view on Capital Goods due to slow and delayed investment cycle, we took some exposure to the sector and even this exposure has hurt the performance.

Overall, the sectoral view has panned out leading to the alpha created in the portfolio over the last 20 months.

Stocks:

Bottoms up stock picking is similar to the one followed for BSL Equity fund. The three hypothesis on which the stock picking is done is explained below :-

First hypothesis being to consistently focus on looking for companies that are at an inflection point like that of Strides Shasun, Dishman Pharma & Piramal Healthcare.

Second hypothesis is to look for companies whose managements were committed to pare debt with better free cash flows from core operations and willingness to sell non-core assets that would release a lot of capital and improve return ratios for shareholders.  Tata Chemicals and Century Textiles are examples of this.  The idea was always that core business was supporting the valuations while the upside would come from non-core sale.

The third hypothesis is always look out for mispricing i.e. when the market believes that current prevailing scenario will last for ever !!!  In these times, one gets to buy asset backed companies at really cheap valuations.  Tata Steel and Hindustan Zinc are such investments we have made.

Additionally, there are some well identified and unique stocks that have done exceedingly well like Birla Corp, Heidelberg Cement, Kansai Nerolac, SH Kelkar etc.