ABSL Frontline Equity Fund Review: Performance at low risk!

Published: March 10, 2019 at 9:06 am

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This is a performance review of ABSL Frontline Equity Fund. We compare the risk and reward of this fund with its benchmark and popular large cap peers. Launched in Aug. 2002, Frontline equity is the largest actively managed large cap fund as on date. Like many of its peers, this too had the freedom to choose from the top 200 stocks by market cap, but had to change gears from June 2018. Let us first consider its investment strategy. You can check out all freefincal fund reviews from here.

ABSL Frontline Equity Fund: Investment strategy

What are frontline stocks? Stocks, which in the opinion of its Fund Manager, provide superior growth opportunities. The previous benchmark was BSE 200 and it has been replaced with Nifty 50. So the investment universe has dropped by half now. More importantly, the fund tries to match the sectoral diversification of the benchmark index (why?!) each quarter with some relaxation in the limits (see link above). This does not however mean the same stocks as the index would be found in each sector chosen by the fund. Going forward, I think this too like all other large caps may find it tough to outperform Nifty 50. I think ABSL has deliberately chosen Nifty 50 instead of Nifty 100 as the benchmark to show outperformance in the future.

ABSL Frontline Equity Fund Review: Performance at low risk!

ABSL Frontline Equity Fund vs Nifty 50 vs Peers (15 years)

There is not much difference in Nifty 50 and Nifty 200 (or BSE 200) returns. So we will use Nifty 50 as the index for comparison. First let us compare the fund with its peers over a 15 year period. The graph just below gives 364 rolling returns and the one below that the rolling standard deviation or risk.

ABSL Frontline Equity Fund 15 year rolling return comparison with index and peers

ABSL Frontline Equity Fund 15 year rolling risk comparison with index and peers

Clearly this is over a short period in time, but that is all that we can work with. During this window, Franklin Blue chip has fallen the most in terms of outperformance. In terms of risk, HDFC Top 100 is unacceptably high. The outpeformance gap between ABSL Frontline Equity and NIfty 50 is consistently high and the fund has lower risk than Nifty 50.

ABSL Frontline Equity Fund vs Nifty 50 vs Peers (10 years)

If we consider a ten year window, we have more data points and a couple of more peers for comparison.

ABSL Frontline Equity Fund 10 year rolling return comparison with index and peers

ABSL Frontline Equity Fund 10 year rolling risk comparison with index and peers

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While ABSL Frontline has consistently outperformed the index over ten years also, the quantum of outperformance has dropped in the last couple of years. The funds seem to be rapidly heading towards Nifty. New investors must keep this in mind. Franklin Bluechip is less volatile than the ABSL fund.

ABSL Frontline Equity Fund vs Nifty 50 vs Peers (5 years)

ABSL Frontline Equity Fund 5 year rolling return comparison with index and peers

ABSL Frontline Equity Fund 5 year rolling risk comparison with index and peers

For five years, we use the older large cap funds for comparison else it would be difficult to decipher the lines. Again ABSL Frontline has done well. Look at the sudden increase in volatility for HDFC Top 100.

ABSL Frontline Equity Fund vs Nifty 50 (3 years)

ABSL Frontline Equity Fund 3 year rolling return comparison with index and peers

If you are worried about the recent underperformance of the fund, it is clear from the above graph it has happened before. So old investors can consider giving the fund some more time to perform (but no guarantees)

Summary

ABSL Frontline equity has been one of the best performing large cap funds. However, it has 200 stock investment universe to beat Nifty 50. Now it has been reduced to 100 (80% of the portfolio). Tying to align sector weights with Nifty 50 instead of BSE 200 may or may not influence future performance. So older investors must (1) temper expectations going forward and (2) keep an eye on performance.

New investors can consider this fund as a low risk alternative to the Nifty 50. However there is no guarantee that if you wait for 5 years that this or any other large cap fund will beat the Nifty 50. I think new investors should stay away from at least large cap and build their portfolio with an aggressive hybrid fund as the core: Why Aggressive Hybrid (balanced) Mutual Funds score over diversified funds. Also see: 11 aggressive hybrid (balanced) mutual funds that have beat Nifty 100!!

If you are an investor in HDFC Top 100, I think it is time to quit. If you hold SBI Bluechip or Franklin Bluechip then you need to have one foot outside the door. This means new investors should avoid them.

 

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Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com

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