Aditya Birla Sun Life Asset Management Company (AMC) has reclassified Aditya Birla Sun Life Top 100 fund as a focused equity fund. The fund is currently a large cap fund, focused on the top 100 stocks by market capitalisation. After the changes, it will be allowed to own stocks across market capitalization. The total number of stocks it can own will be capped at 30. This will force the scheme, which currently has 50 stocks, to drop 2 out of every 5 stocks it owns. Investors in the scheme are in for a major change. The changes will go into effect on 21st May 2018.
SEBI announced a new scheme classification system in October 2017. As part of its re-organisation to comply with the system, Aditya Birla Sun Life AMC classified Aditya Birla Sun Life Top 100 as a focused equity fund with the name ‘Aditya Birla Sun Life Focused Equity Fund.’
A focused equity scheme as the name suggests seeks to maximise returns by taking a focused approach. It buys fewer stocks but with more conviction. The current scheme has an equity allocation range of 80-100%. Out of this equity allocation, the Top 100 companies must account for 65-100%.
Post the changes, the overall equity allocation range will change to 65-100%. The requirement to allocate 65-100% of this allocation to the top 100 stocks will go.
The investment strategy in favour of the top 100 companies is also being diluted. The revised investment strategy in the mandate says, “The scheme will adopt top-down and bottom-up approach of investing and will aim at being diversified across various industries and/or sectors and/or market capitalization.” It then makes an attempt to show continuity by stating, “The funds focus shall be biased towards large cap companies driven by long-term fundamentals though not limited to it.” Note the usage of the word ‘large cap’ rather than ‘top 100.’
A concentrated fund is usually a riskier fund. A fund which moves into mid and small caps also becomes riskier. The upside here is potentially higher returns. However, it is unlikely that the original investors in the fund signed up for this large divergence in the fund’s mandate.
Aditya Birla Sun Life Top 100 currently has an AUM of Rs 3,990 crore. A 76.5% of its portfolio is invested in what certain research firms call ‘Giant Caps’, which means a small number of stocks who account for 50% of the total market capitalisation. Another 16.58% is in large caps, which are again a small number of stocks that account for 20% of the total market capitalisation. In other words, the fund is both on paper and in practice a heavily large-cap, diversified fund. It has an equity allocation of 92.2%. It has delivered a CAGR of 14.92% since its inception in October 2005.
If you don’t agree with the changes, you can exit from the scheme without paying exit load from April 19th to May 18th, 2018. However, you may incur a tax liability in the form of capital gains tax. This is 15% (STCG) if your holding period is less than one year and 10% (LTCG) for longer holding periods. In case of LTCG, your gains before 31st January 2018 will be exempted and you will also get a tax-free long-term capital gains allowance of Rs 1 lakh per annum.
In an emailed comment, Aditya Birla Sun Life Mutual Fund emphasised the fact that the scheme was earlier positioned as large cap and continues to remain large cap. The AMC noted the reduction of stocks required by the scheme classification but added this would be a reduction of a ‘long tail’ and the rebalancing will be a gradual one.
Below is the AMC response:
The changes required as per the recategorisation circular has implications on the following 2 counts:
Number of stocks need to be limited to 30
Fund must choose the Market Cap orientation or strategy followed (Large / Mid / Small / Diversified)
In case of Top 100, which was earlier positioned as a Large Cap oriented fund with a relative concentration of holdings in its top 10 holdings, is repositioned in the Focused Equity category. Towards the same, it continues to be a Large Cap oriented strategy. The key difference is only in the number of stocks. Given that it will reduce its long tail of stocks in the portfolio to a total of 30 stocks in all, the rebalancing of the portfolio is a gradual one. Being large cap oriented (continuing from its earlier positioning) there isn’t a significant impact for investors except the focus in each of its portfolio holdings. As such, on account of reclassification & fundamental attribute change, the scheme has also offered its investors, an option to redeem within 30 days of notice without exit load.