Fund Focus: BNP Paribas Dividend Yield Fund

Racing ahead of the pack with a 15% alpha

Anand Shah, Deputy CEO and Head Investments, BNP Paribas AMC

31st October 2017

BNP Paribas' Dividend Yield Fund is racing ahead of the multicap funds pack this year with a solid 15% alpha on a YTD CY17 basis. Anand and his team's stock picking skills are once again in focus, as some of their thematic insights ahead of the market continue to contribute to handsome alpha generation. That the fund has the longest uninterrupted monthly dividend track record in the industry is an added icing on the cake for those who prefer monthly dividends. Anand takes us through what's driving this strong performance and how his team is navigating markets through the current stretched valuations phase.

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: You are racing ahead of the pack in the multicapspace this year with a solid 15% alpha YTD. What's behind this strong performance?

Anand: Our investment philosophy and stock selection process have been the key to our success. At BNP Paribas, we follow an investment philosophy called BMV, which stands for Business - Management and Valuation. We as a team have stuck to this philosophy and focused on identifying companies having superior and sustainable earnings growth.

BNP Paribas Dividend Yield Fund is a multi-cap strategy with a blend of growth and value stocks. We spotted certain catalysts in some sectors ahead of the market which has worked for us. To give an example, Chinese government's move to curb pollution leading to closure of few highly polluting companies in energy intensive sectors hampered exports in industries like chemicals, steel, aluminium and coal. This move benefited Indian companies as they started to re-gain competitive advantage in the global markets. Also back home, the central government is keen to encourage the use of cleaner fuels which gave a boost to natural gas and cleaner fuel technology companies. We spotted this theme early which has contributed to our achievement.

WF: What does your attribution analysis suggest as the key alpha generators in CY17?

Anand: Our stock selection and allocation both have contributed to our outperformance. Our stock selection in sectors where we anticipated turnaround in business fundamentals leading to superior earnings growth has contributed meaningfully. This includes companies in chemicals, natural gas and metal sectors. Cement which we believe is beneficiary of the housing and infrastructure led boom in the country also aided the performance. Stock selection in consumer discretionary companies like home improvement, multiplexes and textile product companies also had a share in our performance.

From sector allocation standpoint, our overweight position in materials and underweight technology and healthcare sectors has contributed to the performance.

WF: In a market marked by stretched valuations and poor earnings, where do you see good investment opportunities that continue to make sense at current levels?

Anand: The fund aims to invest in a basket of high quality Growth and Value stocks. In terms of Growth, the fund aims to invest in companies with 'superior' and 'sustainable' earnings growth potential. In terms of Value, the fund aims to invest in companies with strong operating cash flow visibility and sound balance sheets available at reasonable valuations.

In line with our investment philosophy we continue to scout for companies with sound business fundamentals and strong moat which will continue to do well even if their valuations seem stretched. High valuations are not a deterrent to our portfolio building process but we would remain cognizant of the price we pay.

WF: Some fund houses are now advocating multicap products ahead of large cap funds for first time investors, given their track record of superior performance with around the same degree of volatility. Would you agree that multicaps should be the first default equity fund allocation for investors instead of the traditional large cap funds?

Anand: Investing in large caps has its own merits. We think from a diversification standpoint an investor should look at multi-cap strategy. As multi-cap funds doesn't restrict itself to companies defined by market capitalisation and takes advantage of opportunities presented by all capitalisations. In the times when the market is in bull or bearish phase these funds are better positioned than the restricted mandate funds as the manager dynamically shifts between large, mid and small stocks to participate in upside or contain downside. Also a multi-cap fund is able to take advantage of both growth and value style of investment as their investment universe is very large. An investor should however note thatthe risk associated with a multi-cap strategy maybe be slightly higher than the large cap funds.

WF: Your fund has the longest history of uninterrupted monthly dividends. How long does this history stretch back and what is the current "dividend yield" that the fund offers?

Anand: Since Jan 2013, the Fund paid out 57 dividends in the last 57 months in distributor dividend option, as of Sep. 2017. In Sep. 2017 the Fund offered dividend yield of 1% per month.

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