Aditya Birla SL Frontline Equity Fund: Securing Long-term Growth - Outside View by PersonalFN

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Aditya Birla SL Frontline Equity Fund: Securing Long-term Growth
Oct 16, 2020

A significant number of large cap funds have struggled to outpace the benchmark index in the last few years. However, if you have invested in a large cap fund to achieve a particular goal, it is important to ignore the short term underperformance and stay invested till you reach the set target.

Mutual fund managers invest in a diversified portfolio of stocks and sectors. The performance of each stock/sector, market capitalisation depends on various micro and macro-economic factors. Over a period of time, growth may be conducive for select stocks/sectors and/or strategies, but not for others; though it is likely to play out eventually.

Over the long term, equity mutual funds across most categories and sub categories have been observed to deliver healthy returns, higher than most other investment avenues.

Aditya Birla SL Frontline Equity Fund (ABSLFEF) is one such large cap fund that has a history of rewarding investors with superior risk-adjusted returns over longer time periods.

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Graph 1: Growth of Rs 10,000 if invested in Aditya Birla SL Frontline Equity Fund 5 years ago

ABSLFEF is among the few large-cap schemes with a history of close to 20 years, along with a superior track record to its credit. Since its inception in August 2002, ABSLFEF has appreciated at around 18.7% CAGR and has stood among top quartile performers during various time periods. While focusing on growth oriented large cap stocks, the fund gives high importance to risk management and resists putting investors' money to unnecessary risk. Over the past five years, ABSLFEF has generated a compounded annualised return of 7.8%, which is slightly lower than the 9.3% CAGR generated by the benchmark Nifty 50 - TRI. An investment of Rs 10,000 in the scheme five years back would have been valued at Rs 14,529. A simultaneous investment of Rs 10,000 in the benchmark would now be worth Rs 15,624.

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Table: Aditya Birla SL Frontline Equity Fund's performance vis-a-vis category peers
Scheme Name Corpus (Cr.) 1 Year (%) 2 Year (%) 3 Year (%) 5 Year (%) 7 Year (%) Std Dev Sharpe
Axis Bluechip Fund 17,270 5.60 13.50 10.86 12.43 15.07 17.11 0.097
Canara Rob Bluechip Equity Fund 788 14.21 14.26 10.40 11.93 14.01 18.56 0.087
BNP Paribas Large Cap Fund 849 5.97 12.27 7.16 9.17 14.06 18.48 0.041
Edelweiss Large Cap Fund 193 8.62 9.42 7.15 9.64 13.14 20.49 0.049
Kotak Bluechip Fund 1,678 10.34 10.91 6.90 9.36 13.86 21.09 0.041
Mirae Asset Large Cap Fund 18,450 8.51 9.04 6.42 11.55 17.16 21.17 0.042
ICICI Pru Bluechip Fund 23,423 2.58 5.16 3.96 9.09 12.78 20.52 0.008
SBI BlueChip Fund 22,058 2.85 7.30 3.54 8.36 14.00 21.12 -0.002
Aditya Birla SL Frontline Equity Fund 17,191 4.18 4.96 2.23 7.75 12.75 20.95 -0.018
HDFC Top 100 Fund 15,759 -5.30 0.19 0.87 6.55 11.38 22.51 -0.025
NIFTY 50 - TRI 6.65 7.97 6.78 9.32 11.40 21.20 0.038
Returns are point to point and in %, calculated using Direct Plan - Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on October 13, 2020
(Source: ACE MF)

*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

ABSLFEF's performance in the ongoing corrective phase has not been too impressive which has impacted its short term performance. The fund has trailed the benchmark and many of its peers in the last 1-year to 3-year period. This is the first instance where the fund's performance has been under pressure. However, it has done well over longer time periods, delivering decent returns for its investors. Over the 7-year returns periods, the fund has generated compounded annualized return of 12.8%, which is over 1 percentage point higher than the benchmark index.

On the risk front, while ABSLFEF's returns have come at a reasonable volatility, it has seen a drop in its risk-adjusted returns calculated over the past 3 years due to poor returns in the last few years. Its Sharpe ratio is in a negative zone and far lower than the benchmark and the category average.

Investment strategy of Aditya Birla SL Frontline Equity Fund

ABSLFEF aims to generate market-beating returns by following a fundamental driven research approach. The fund invests around 85% in large caps, while it also seeks opportunities in midcaps where it allocates around 10% of its assets. ABSLFEF primarily follows bottom-up approach to investing, while also takes some tactical and structural calls through top-down approach. While picking stocks for its portfolio, the fund manager gives high weightage to growth and aims to invest in quality businesses supported by quality management and good balance sheet, and stays invested in them.

The starting point of the investment strategy is the thinking from a top down perspective, where the fund manager considers global and economic factors and then moves to bottom up strategy to pick stocks that can benefit in those scenarios. Anything that fits in top down and bottom up is preferred contender for the portfolio.

Graph 2: Top portfolio holdings in Aditya Birla SL Frontline Equity Fund

ABSLFEF usually invests in a well-diversified portfolio of 60-65 stocks. The fund held 64 stocks in its portfolio as on September 30, 2020 reasonably diversified across individual stocks and sectors. Reliance Industries topped the list with an allocation of 8.1%, followed by Infosys, HDFC Bank and ICICI Bank. Bharti Airtel, HDFC, HUL, Cipla, Kotak Mahindra Bank and HCL Technologies have been among the other prominent holdings in the portfolio. The top 10 holdings accounted for about 50% of the portfolio.

Stocks like Reliance Industries, Avenue Supermarts, Infosys, Divi's Laboratories, Nestle India, Asian Paints, etc. have been the major contributors to ABSLFEF's gains in the last one year. On the other hand, the fund lost value in stocks like HDFC, ICICI Bank, Kotak Mahindra Bank, Ultratech Cement, among others.

With a combined exposure of close to 33% in Banking and Finance, ABSLFEF's portfolio is highly concentrated towards Financial services stocks, though it has reduced its exposure in the sector over the last one year. The fund also holds significant exposure Infotech, Consumption and Petroleum. Pharma, Telecom, Cement, Auto and Engineering figure among the other prominent sectors in the fund's portfolio.

Suitability

ABSLFEF's performance has been under pressure for quite some time and has slipped in terms of rankings. However, the fund has proven its ability to generate market-beating returns over longer time periods. It resists from compromising on risk and does not aggressively chase returns. ABSLFEF has an experienced fund manager at the fore who has successfully steered the fund through multiple market cycles in the past. This makes ABSLFEF suitable for investors with moderately high risk appetite and investment horizon of at least 5 years.

Editor's note: The last few years have not been among the best for equity mutual funds. While most funds have underperformed or are struggling to match the returns of the benchmark, there are few funds that have the potential to constantly generate alpha for its investors. And we have identified five such high alpha generating funds, in our latest report 'The Alpha Funds Report 2020'. Do not miss our latest research finding. Get your access to this exclusive report, right here!

Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

Author: Divya Grover

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

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