Birla Sun Life Banking and Financial Services Fund: Bank on this fund - Buy

The Indian stock market is likely to remain volatile as long as global financial markets react to concerns on China’s slowdown and oil prices remain low. But despite global uncertainties, parts of the Indian economy are likely to start firing as the Centre kick-starts investment activity. If you are looking to bet on the slow but likely recovery in the economy, banking is a sector that is well-placed to play this theme.

While banking stocks have performed poorly in the last year, valuations are cheap and many banks offer investment opportunities due to possible earnings upgrades.

Investors with an appetite for risk can invest a portion of their portfolio in banking sector funds. Birla Sun Life Banking and Financial Services fund, which was launched two years ago, has turned out to be the best-performing banking fund in the last one year.

While the fund has a shorter track record than peers ICICI Prudential Banking and Financial Services, Reliance Banking and Religare Invesco Banking Fund, its performance both in the 2014 rally and lacklustre 2015 market is noteworthy.

Despite being a sector fund, Birla Sun Life Banking’s portfolio has a lower concentration in each of its stocks. The fund has investments in over 20 stocks currently. The top 10 stocks constitute about 75 per cent of its holdings (comparable with ICICI Pru Banking Fund), which is far lower than the 80-90 per cent that Reliance Banking or Religare Invesco Banking Fund carry. This pegs the risk a tad lower. While HDFC Bank is the top holding across all banking funds, Birla Banking Fund’s holding in the leading private bank is about 15 per cent, far lower than the 28-30 per cent that Reliance and Religare Banking Fund hold.

This provides enough headroom to outperform the benchmark, Nifty Financial Services (earlier CNX Finance).

The benchmark is highly skewed in favour of a few stocks — over 60 per cent comprises three stocks; HDFC, HDFC Bank (24 per cent) and ICICI Bank.

Birla Banking Fund’s three strategies, as laid down at the time of the NFO, have paid off well. One, the fund has kept to its mandate of being overweight on private banks. A chunk — about half of its portfolio in the last two years — has been in private banks. Two, the fund has been selective in picking PSU bank stocks, even during the mad rally of 2014. SBI and Bank of Baroda, relatively stronger PSUs, have been its preferred bets.

Lastly, the fund has invested across the wider spectrum of financial services, including housing finance companies and conglomerates with interest across insurance and asset management. This has helped returns.

But within these broad mandates the fund has deftly moved in and out of stocks and segments. For instance, in 2014, while it maintained a chunk of its holdings in private banks, it took its holdings in PSU bank stocks to as high as 20 per cent during the year, from 8-9 per cent, to make the best of the rally in select PSU bank stocks. In 2015, on the other hand, when many private banks slipped, the fund increased holdings in companies such as Cholamandalam Investment & Finance, Bajaj Finance and ICRA. This helped it cap the loss to just 0.5 per cent, when the benchmark fell 5 per cent and other funds, such as ICICI Pru and Reliance fell 7-8 per cent.

Currently, the fund holds 49 per cent in private bank stocks. It holds only one stock from the PSU space (Bank of Baroda).

This indicates the fund’s cautious stance. However, it may include select PSU bank stocks, as in the past, in the coming months.

Within the private banks space, it has holdings in leading banks, such as ICICI Bank and Axis Bank, which have slipped over 20 per cent in 2015.

With asset quality concerns bottoming out in these banks, cheap valuations make a good case for investment.

Investments in other finance companies, such as Repco, LIC Housing, Bajaj Finance and SKS Microfinance, too, can provide a kicker to returns.

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