Should you invest in the NFO of Aditya Birla Sun Life Business Cycle Fund?

Aditya Birla Sun Life AMC has thrown its hat into the business cycle fund ring with its own offering. The new fund offer (NFO) closes on Novembr 29, 2021. This is the fifth such thematic product in this space.

Business cycle relevance

A business cycle is defined in terms of periods of expansion and contraction. Each business cycle has 4 phases — expansion, peak, contraction and slump. Key indicators are different for each phase. Business cycle/stage also leads to different market behaviour, even though market returns are largely driven by earnings growth and change in sentiment/valuation.

It is important to understand that sector returns vary through phases of business cycle. For instance, in the pharma upcycle from 2012 to 2015, Nifty Pharma gave 202 per cent gain versus Nifty’s 87 per cent. In the subsequent downcycle that lasted till January 2020, Nifty Pharma lost 53 per cent versus 12 per cent drop in Nifty. In the next upcycle, which is ongoing, Nifty Pharma is up 123 per cent. Such trends have been displayed in IT, metals sector, capital goods, housing finance sectors, for instance, in their respective cycles.

Also, industry-specific cycle could differ from the stage of ongoing economic cycle. The bottom line — there is no fixed template. Successful investing requires deft manoeuvring to be present in the right set of sectors at the right time. In doing so, one can capitalise on secular as well as cyclical opportunities. So, by identifying and navigating business cycles accurately, even a thematic equity fund can become an all-weather vehicle.

Fund approach

Aditya Birla Sun Life Business Cycle Fund aims to deploy the business cycle approach. It can invest across sectors and market caps, without any bias. The fund believes the Indian economy is in expansion phase.

The investment approach will be top-down i.e. starting from macro economy to sector selection to choosing the right stocks. The fund endeavours to bifurcate portfolio between defensives such as FMCG, utilities, healthcare, IT and non-defensive sectors such as metals, infra, capital goods, financials, cement, consumer durables, auto, etc.

Defensives usually have stable earnings irrespective of stage of business cycle, while earnings vary with the stage of business cycle for non-defensives. Also, defensives perform through contraction phase while non-defensives perform during expansion.

For sector allocation, Aditya Birla Sun Life Business Cycle Fund will look at stage of economic cycle, correlation of cycle with different sectors, growth potential and valuation level/margin of safety. Stock selection will follow growth at reasonable price (GARP) philosophy, a blend between growth and value investing frameworks. Portfolio price to earnings of peer business cycle funds ranges between 30 and 39 times. For some peers, portfolio parameters such as market-cap allocation and number of stocks is based on the stage of business cycle.

The scheme has headroom to chase global opportunities i.e. can invest up to 20 per cent of net assets in foreign securities. Global exposure can add zing to returns as well as come in handy during a period of domestic recession. Among recent launches, Tata Business Cycle Fund also has similar flexibility.

Our take

Some could argue that a thematic business cycle fund is not very different from flexi-cap funds. Do note, this business cycle fund claims to have flexibility for a more aggressive stance (leading to higher risk & return) in terms of sector over/under weight. Also, most flexi-cap funds have disciplined high large-cap allocation (average 66 per cent), while this business cycle fund is starting out with no bias. Peers from ICICI, Baroda and Tata have over 60 per cent large-cap allocation, but the L&T offering has 44 per cent large-cap exposure currently. It remains to be seen which side this fund takes. Its benchmark will be S&P BSE 500 Total Return Index.

Given the thematic nature, business cycle-based investing is ideal for high-risk investors with an investment horizon of more than 5-7 years. Though business and sector cycles are shortening, a bigger window should be given to let the fund manager play across opportunities. We are inclined to believe that a business cycle find may be a better way to take aggressive position in sectoral/thematic opportunities, instead of investors taking sector/theme calls on their own that can go horribly wrong.

Accurate identification of business cycles is a tough task and consistently repeating the same is even tougher. This is where the experience of the fund management team will be tested. L&T Business Cycles Fund is the only peer fund with a long track record. It has outperformed S&P BSE 200 TRI in 1-year by 500 basis points (bps), but has lagged in 3- and 5-year periods as well as since inception. This highlights the practical difficulty of walking the talk in business cycle investing.

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