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Birla SunLife Frontline Equity Fund

 

Birla Sun Life Frontline Equity is a large-cap growth fund that was started in August 2002. Currently the fund has assets under management worth Rs. 2,935.67 crore. It is benchmarked against the BSE 200 Index.

Fund performance

	Scheme		YTD		6-month		1-year		3-year		5-year		10-year		Since inception
Birla SL Frontline Equity Fund(G)		2.00		20.42		25.18		9.92		8.25		25.93		25.03
BSE-200		1.52		16.39		17.31		6.00		1.99		20.43		--

Figures in %; as on Jan 31, 2013

The fund has beaten its benchmark across all the time horizons shown above. Since inception it has given its investors a compounded annual return of 25.03 per cent, which is high.

	Scheme		2012		2011		2010		2009		2008
Birla SL Frontline Equity Fund(G)*		36.17		-23.30		18.70		86.18		-49.00
BSE-200*		30.80		-27.29		16.22		83.65		-56.73
Out/under performance**		5.36		3.99		2.48		2.54		7.73

*in %; in %age pts.

The fund has also beaten its benchmark in all the previous five calendar years, thus displaying great consistency in performance. It has also provided sound downside risk protection to its investors. In the declining markets of 2011 and 2008, the fund beat its benchmark by reasonable margins.

Portfolio characteristics

Number of equity holdings. The fund currently holds 66 stocks in its portfolio. This is higher than the median count of 43 for the diversified-equity category. Over the last five years, the equity count in its portfolio has averaged 52.89. Thus, even historically the fund has always had a diversified portfolio.

Sector concentration.

			Top 3		Top 5		Top 10
Birla SL Frontline Equity Fund(G)		34.79		44.19		62.47
Median-diversified equity funds		33.84		46.56		67.38

Figures in %

While the fund's concentration in the top three sectors in its portfolio is higher than the median, it is lower in the case of the top five and 10 sectors.

Company concentration.

			Top 3		Top 5		Top 10
Birla SL Frontline Equity Fund(G)		13.67		20.20		34.31
Median-diversified equity		17.90		27.00		44.67

Figures in %

The fund's concentration in the top three, five and 10 stocks in its portfolio is lower than the median for the diversified-equity category.

Thus, an examination of parameters such as number of equity holdings, sector concentration and company concentration shows that the fund has a well-diversified portfolio.

Turnover ratio. According to its last disclosure (March 2012), the fund had a turnover ratio of 94 per cent. This is higher than the median of 71 per cent for the diversified-equity category.

Since December 2008 (the period for which we have data available), the fund has had an average turnover ratio of 252.08 per cent. Since March 2010, however, turnover ratio has come down considerably, averaging 62.80 per cent. Thus, it appears that the fund manager has decided to move towards a strategy of churning the portfolio less, which in our view is a positive development.

Expense ratio. The fund currently has an expense ratio of 2.95 per cent. This is much higher than the current median of 2.50 per cent for the diversified-equity category. When we had last reviewed this fund in June 2012, its expense ratio was only 1.86 per cent.

Risk.

	Scheme		SD		Beta
Birla SL Frontline Equity Fund(G)		0.9661		0.8622
Median-diversified equity		0.9528		0.7988

An examination of risk measures such as standard deviation and beta(calculated over a three-year period) indicates that the fund lies in the riskier half of the diversified-equity category.

Risk-adjusted returns.

	Scheme		Treynor		Sharpe
Birla SL Frontline Equity Fund(G)		0.0346		0.0309
Median-diversified equity category		0.0283		0.0240

An examination of measures such as Treynor ratio and Sharpe ratio (also calculated over a three-year period) indicates that the fund has given higher risk-adjusted returns than the median for the diversified-equity category.

Cash allocation.

Over the last five years the fund has had an average cash allocation of 8.63 per cent. An allocation of up to 5 per cent is considered okay. In recent times, however, allocation to cash has come down: in 2012 it averaged 3.51 per cent. The move towards lower cash holdings is a positive.

Portfolio strategy

2012. In 2012 the Sensex rose 25.70 per cent, the BSE Mid-cap Index rose 38.52 per cent and the BSE Small-cap Index rose 32.97 per cent.

That year the fund rose 36.07 per cent, thereby leading its benchmark (which rose 30.98 per cent) by a considerable margin.

In 2012 the fund had an average allocation of 89.18 per cent to large-cap stocks, 5.89 per cent to mid-cap stocks, and a minuscule 0.28 per cent (in January and February) to small-cap stocks. The fund also had an average allocation of 4.80 per cent to the 'others' category. Thus, the fund runs a predominantly large-cap portfolio, which makes it a suitable fit for the investor's core portfolio.

	Benchmark		YTD (%)
BSE BANKEX		56.72
BSE Realty		53.44
BSE FMCG		46.61
BSE Consumer Durables		46.08
BSE IPO		44.44
BSE AUTO		40.31
BSE Health Care		38.53
BSE Capital Goods		34.71
BSE METAL		19.13
BSE PSU		15.24
BSE OIL & GAS		13.14
BSE Power		10.86
BSE TECk		1.41
BSE IT		-1.18

Bankex, realty, FMCG, etc. were among the high performers of 2012 while IT, teck and power were at the bottom.

	Sector		March 2012 (%)		December 2012 (%)		Raised/lowered allocation (%age pts.)
Bank – Private		13.41		16.91		3.50
Oil Exploration		1.93		4.02		2.09
Pharmaceuticals & Drugs		5.82		6.95		1.13
Auto Ancillary		2.75		3.30		0.55
Engineering - Construction		3.39		3.91		0.52
Finance – Housing		4.33		4.66		0.33
Bank – Public		2.94		2.88		-0.06
Cigarettes/Tobacco		4.97		4.17		-0.80
IT - Software		12.09		10.93		-1.16
Refineries		7.62		4.74		-2.87

In 2012 the fund raised its allocation to private banks, oil exploration, pharma and so on (see table above). Among its top 10 sector holdings, the fund reduced its allocation to sectors such as refineries, IT software, cigarettes and tobacco and public banks.

	Sector		Fund (%)		BSE-200 (%)		Over/under weight vis-à-vis index (%age pts.)
Bank – Private		16.91		13.75		3.16
Auto Ancillary		3.30		0.69		2.61
Pharmaceuticals & Drugs		6.95		5.48		1.47
Oil Exploration		4.02		3.66		0.36
IT - Software		10.93		10.59		0.34
Engineering - Construction		3.91		3.86		0.05
Finance – Housing		4.66		4.93		-0.27
Cigarettes/Tobacco		4.17		6.10		-1.93
Bank – Public		2.88		5.18		-2.30
Refineries		4.74		7.12		-2.38

Figures are for December 2012

By the end of the year the fund was overweight vis-a-vis its benchmark on private banks, auto ancillary, pharma and so on (see table above). Among its top 10 sector holdings, the fund was underweight vis-à-vis its benchmark on refineries, public banks, cigarettes and tobacco and housing finance.

	Company		January 2012 (%)		December 2012 (%)		Raised/lowered allocation (%age pts.)
IndusInd Bank Ltd.		1.54		3.08		1.53
Larsen & Toubro Ltd.		2.11		3.44		1.33
Cummins India Ltd.		1.59		2.81		1.22
HDFC Bank Ltd.		2.05		3.01		0.96
Housing Development Finance Corporation Ltd.		2.56		3.10		0.54
ICICI Bank Ltd.		5.40		5.58		0.18
ITC Ltd.		4.54		4.17		-0.38
Tata Consultancy Services Ltd.		3.29		2.66		-0.64
Dr Reddys Laboratories Ltd.		3.26		2.55		-0.71
Reliance Industries Ltd.		5.76		3.92		-1.84

In 2012 the fund raised its allocation to IndusInd Bank, Larsen and Toubro, Cummins India and so on. During the year it lowered its allocation to stocks like Reliance Industries, Dr Reddy's Laboratories, TCS and ITC.

	Company		Fund (%)		BSE-200 (%)		Over/under weight vis-à-vis benchmark (%age pts.)
Cummins India Ltd.		2.81		0.26		2.55
IndusInd Bank Ltd.		3.08		0.67		2.41
Dr Reddys Laboratories Ltd.		2.55		0.91		1.64
ICICI Bank Ltd.		5.58		4.99		0.59
Larsen & Toubro Ltd.		3.44		3.26		0.18
Tata Consultancy Services Ltd.		2.66		2.89		-0.23
Housing Development Finance Corporation Ltd.		3.10		4.62		-1.52
HDFC Bank Ltd.		3.01		4.64		-1.63
ITC Ltd.		4.17		6.10		-1.93
Reliance Industries Ltd.		3.92		6.05		-2.13

By the end of the year the fund was overweight vis-a-vis its benchmark on Cummins India, IndusInd Bank, Dr. Reddy's Laboratories and so on (see table above). Among its top 10 stock holdings, the fund was underweight vis-a-vis its benchmark on Reliance Industries, ITC, HDFC Bank, HDFC and TCS.

Fund manager

The fund is managed by Mahesh Patil who has been at its helm since November 2005 and is the man behind the fund's robust track record. Patil is also Co-head of Equity at Birla Sun Life AMC and has about 20 years of work experience. He also manages funds like Birla SL Top 100, Birla SL Long Term Advantage and Birla SL Infrastructure.

Conclusion

The fund has an enviable track record: it has beaten its benchmark over various time horizons and also displayed great consistency in calendar-year returns. Some of the fund's features that we like include its well-diversified portfolio and the fact that it has lowered its turnover ratio and cash holdings in recent times.

However, the fund has hiked its expense ratio to a high level recently. It will be interesting to watch if such a high expense ratio affects the fund's performance in future.

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