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WF: BSL 95 has delivered a CAGR of 22.41% over 20 years vs Nifty's 15.07% CAGR, despite being a balanced fund which allocates 25-35% to debt, and debt does not fetch anywhere close to Nifty returns in the long run. To what then, would you attribute this performance - is it only stock picking or is it also a reflection that in a volatile market like India, balanced funds play a critical role in managing volatility?
Mahesh Patil: I think there are 2 main reasons why BSL 95 and some other balanced funds have given returns almost akin to diversified equity funds over long periods of time. One is that the equity and debt allocation is managed dynamically, due to the product structure. This means you are automatically taking profits in rising markets and investing in falling markets, which, in a market like India, which is quite volatile, adds significant value.
The second aspect is that the presence of 25-35% debt component in the portfolio, actually enables us to be a lot more bottom up oriented with the equity component. In diversified equity funds, there is always some consideration you need to give to benchmarks and heavyweights in benchmarks. This is not the case with a balanced fund. In a balanced fund like BSL 95, we are a lot more bottom up oriented, which reflects in the long term performance as well. Stock picking is actually aided when you know that there is a debt component that brings some stability to the portfolio.
The result is that if you look at risk adjusted returns, BSL 95 scores better than many diversified equity funds.
Click here to know more about percentiles and the colour codes
What do percentiles and their colours signify?
Fund performance is typically measured against benchmark (alpha) and against competition.
Performance versus competition is measured through percentile scores - ie, what
percentage of funds in the same category did this fund beat in the particular period?
If a fund's rank in a year was 6/25 it means that it stood 6th among a total of
25 funds in that category, in that period. This means 5 funds did better than this
fund. In percentile terms, it stood at the 80th percentile - which means 20% of
funds did better than this fund, in that particular period. If, in the next year,
its rank was 11/26, it means 10 other funds out of a universe of 26 did better than
this fund - or 38% of funds did better than this one. Its percentile score is therefore
62% - which signifies it beat 62% of competition.
Most fund managers aim to be in the top quartile (75 percentile or higher) while
second quartile is also an acceptable outcome (beating 50 to 75% of competition).
What is generally not acceptable is to be in the 3rd or 4th quartiles (beating less
than 50% of competition). Accordingly, we have given colour codes aligned with how
fund houses see their own percentile scores. Green colour signifies top quartile
(percentile score of 75 and above), yellow or amber signifies second quartile (percentile
scores of 50 to 74) and red signifies 3rd and 4th quartile performance. A simple
visual inspection of colour codes can thus give you an idea of how often this fund
has been in the top half of the table and how often it slips to the bottom half.
A great fund performance is one which has only greens and yellows and no reds -
admittedly a tall ask!
WF: BSL 95's performance came back strongly in 2014 - back to the 1st and 2nd quartile that has marked its performance over the years - after a relatively difficult couple of years in 2012 and 2013 in terms of performance vs peers. What were some of the changes in fund strategy and positioning that got BSL 95 back to its winning ways?
Mahesh Patil: In 2012 and 2013, although the fund delivered positive alpha, it did lag some of its peers. During that period we became a little defensive with the portfolio construction, given the uncertainties in the market. We also had a lot more large cap oriented stocks than our peers and in a period where market was range bound it led to relatively lower returns than some of the peers.
In 2014, we shed this defensive orientation, became a lot more bottom-up focused in stock selection, and consequently added a lot more of midcaps into the fund. This worked well for the fund as midcaps outperformed significantly and enabled us to perform well in 2014.
Going forward, this is the strategy that BSL 95 will stay with. We will be purely bottom-up driven, which may mean that we will have sizeable exposure to midcaps on an ongoing basis. We will look for secular growth stories, whether in the large or mid caps spaces. I think this strategy should enable us to sustain a 1st or 2nd quartile performance going forward.
WF: BSL 95's old avatar, Alliance 95, was the flagship scheme of Alliance when you took over their assets. What were some of the challenges in the integration of the scheme into your portfolio, from a fund management perspective?
Mahesh Patil: When we acquired these funds from Alliance in 2005, the characteristics of the funds were different from the style that we at BSL had adopted. Portfolios were very concentrated in few names, which is not our preferred approach. There were also a number of "concept" stocks - good concepts but weak numbers and high valuations.
Our main task was to reorient BSL 95 and other schemes that came in from Alliance, to fit into our fund and risk management framework. As you know, we put a lot more emphasis on seeing visibility of cash flows and sustainable growth, when evaluating stocks for our portfolios. The task of aligning was a bit extensive, but we could complete it in a few months time, since the portfolios were not very large. Since 2006, BSL 95 has been managed within our fund and risk management framework.
WF: Balanced funds as a category have never really got the kind of business traction that their performance warrants. What are we as an industry not doing well enough - what do we need to do more of to get this category its fair share of investor allocations?
Mahesh Patil: I think in the past, we had a situation where many advisors believed that the task of asset allocation was perhaps better done at their end, rather than leaving it to a product like a balanced fund. Two things are now happening, which I think are changing the trend in favour of balanced funds. First is the tax changes on debt funds last year have now made balanced funds a lot more appealing, as investors and advisors see the merit of keeping their debt allocations tax effective, within a balanced fund structure.
Second, as many more retail investors are now considering equity allocations, advisors are realizing that they may not be able to effectively monitor asset allocations for growing number of customers and therefore, investor interests are better served by advising them to invest in balanced funds.
That said, I think we need to continuously keep our communication level high on the benefits of balanced funds. The fact that balanced funds have delivered a superior risk adjusted return over long periods of time, the benefits of managing volatility due to the product structure and the tax efficiency of the product - all of these must be continuously and strongly communicated.
At BSL, we are seeing encouraging flows in recent months into BSL 95, and I hope this trend will accelerate further, going forward.
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