Mutual Funds

BNP Paribas Equity: Buy

Nalinakanthi V | Updated on November 22, 2014

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This fund has added defensives and exited stocks with high earnings volatility

With election results hardly a month away, markets are already factoring in a stable Government. Should the outcome turn adverse, markets may see a sharp slide. In such times, a large-cap fund with a defensive tilt may suit investors with a low risk appetite. BNP Paribas Equity falls into this category. The fund has outperformed its benchmark, Nifty, across one-, three- and five-year time periods. It has also outperformed its peers — DSP BlackRock Equity and HSBC Equity. Barring 2011, the fund has managed to pay dividends regularly beginning 2005.

Defensive tilt

The fund’s performance has improved considerably since the course correction it undertook in 2011. It has re-aligned its portfolio by adding stocks in the defensive space and exiting stocks with high earnings volatility.

For instance, between April 2011 and February 2012, the scheme increased exposure to pharma, auto and auto ancillary while it reduced exposure to oil, gas and refinery stocks.

The fund manager’s attempt to catch a few themes ahead of others did not work at all times. However, prompt corrective action after the brief periods of under-performance helped the fund stay ahead of its benchmark in the medium term.

For instance, on expectation of softer interest rates and faster recovery in the economy, the fund increased allocation to cyclicals such as financials and engineering and reduced holding in consumer goods stocks. But the fund was proved wrong quite soon, as the rally in consumer goods continued well into a large part of 2013.

However, the fund was quick to change course by buying into these defensive stocks and selling high beta banking and engineering stocks.

This is evident from the fund’s expense ratio of 2.7 per cent, which is a tad higher than the category average.

Annual returns over the last five years are over 10 per cent.

Currently, the fund holds 44 stocks in its portfolio with a weighted average market capitalisation of over ₹1 lakh crore, indicating its tilt towards index blue chips.

The portfolio is well balanced across defensive and cyclical stocks. However, allocation of over 19 per cent of its assets in IT stocks lends it a higher defensive tilt.

While this may limit the downside during volatile times, IT stocks may not continue to outperform at the same pace, should the country’s economic prospects improve over the next one year and other sectors catch the market's fancy.

Published on April 20, 2014

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