Safety and thrills from time-tested veteran - Birla Sun Life Frontline Equity: Buy

The market is on a roll scaling new heights each week. But some are getting edgy about whether the rally will sustain or lose steam.

If you are among those seeking somewhat safer ground now but have an eye on future growth too, market veteran Birla Sun Life Frontline Equity is a fine choice.

The large-cap focus of this 15-year old fund should help contain downside if the market turns weak. This was demonstrated during earlier episodes of falling markets — in 2009, 2011, 2013 and 2016 — when the fund lost much less than its benchmark, BSE 200.

Birla Sun Life Frontline Equity may not be a chartbuster like some other large-cap funds in raging bull markets. That’s because the fund invests mainly in large-cap stocks (at least 80 per cent of the corpus across market cycles) with less exposure to smaller stocks (maximum 15 per cent to mid-caps) than several peers in the category.

That said, the fund’s performance during market rallies has been robust too; it has done better than the benchmark in all market upside overs the past five years. While over the past year, the fund’s performance has been just about at par with the benchmark, the outperformance over three to five years has been in the range of 3-5 percentage points annualised.

The fund has been a consistent winner; its daily one-year rolling returns have been better than the benchmark’s almost all the time over the past five years, though there has been some slippage on this count the past year.

The ability to contain downside and participate well in rallies places the fund in the top quartile among large-cap peers over the long run, though it slips a notch or two in shorter periods.

Birla Sun Life Frontline Equity bets on stocks of high-growth, high-potential companies, chosen following a bottom-up approach. The fund manager Mahesh Patil looks at mispricing of stocks. A growth investing approach could mean some costly picks, for instance, Maruti Suzuki and Bajaj Finance, but this risk is mitigated by high-quality picks that have delivered well and a large portfolio of 70-80 stocks. About 90 per cent of the fund is invested in about 50 stocks.

A large corpus (about ₹17,700 crore) makes the fund one of the largest in the equity space. But this has not been a constraint in stock-picking and churn, given the fund’s large-cap focus. Large size and a buy-and-hold approach help keep expense ratio low (about 2 per cent) compared with most peers, aiding returns.

The fund remains invested mostly in equity (about 90-98 per cent of corpus) across cycles with the rest mostly in cash and equivalents and sometimes in other funds from the fund house.

The fund has exhibited good stock selection and sector rotation. For instance, stocks such as Motherson Sumi and Bayer CropScience have given manifold returns over the past few years. The fund was quick to latch on to cyclical stocks in late 2013 that rallied sharply thereafter. Last year, it reduced exposure to the beleaguered software sector while upping stake in finance companies that have much growth potential. While the large portfolio includes stocks from several sectors, private sector banks account for the largest chunk. The fund recently cut stake in Reliance Industries due to its high valuation after the run-up.

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