Factor investing is about identifying the factors that contribute to successful investing. Every stock displays certain factors, the performance of every stock can be attributed to the presence of a set of factors and these factors can be tracked & used for making informed investment decisions.
Equity investors are flocking to factor investing, as it assists in improving the quality of the portfolio, and performance, reducing volatility, and increasing diversification. The new age ‘smart investing’ strategy is gaining considerable popularity. In 2022 itself, investors in India infused more than Rs 1,900 crores in Smart Beta funds, these funds come under the universe of factor investing. Smart Beta Funds are those funds that have a weighting methodology different from traditional market-cap weighting. And these funds follow factors like value, momentum, quality, low risk, etc., that can be used in isolation or as a combination to create some unique basket of stocks.
The Quality of a company is based on the financial health of the company. Factor investing basis ‘Quality’ involves focusing on the quality attributes of stocks to guide portfolio decisions. Quality metrics are financial attributes that gauge the profitability and solvency of a company – namely RoE, EPS growth and financial leverage. Factor investing through passively managed funds provides investors with the benefit of low costs and transparency and tracks indices that are modelled on specific, well-researched and quantifiable stock characteristics.
Aditya Birla Sun Life Mutual Fund has launched Aditya Birla Sun Life Nifty 200 Quality 30 ETF. It is an open-ended exchange-traded fund tracking Nifty 200 Quality 30 TRI. The scheme aims to build a portfolio of high-quality stocks within the Nifty 200 universe and enhance the ‘Quality’ of your portfolio through smart factor investing.
Table 1: Details for Aditya Birla Sun Life Nifty 200 Quality 30 ETF
|An open ended exchange traded fund tracking Nifty 200 Quality 30 TRI
|The investment objective of the Scheme is to generate returns that are in line with the performance of the Nifty 200 Quality 30 Index, subject to tracking errors. The Scheme does not guarantee/indicate any returns. There can be no assurance that the objective of the Scheme will be achieved.
|Rs 100 and in multiples of Re 1/- thereafter.
|Rs 10/- per unit
|Mr Lovelish Solanki
Mr Pranav Gupta
|Nifty 200 Quality 30 TRI
|July 29, 2022
|August 10, 2022
(Source: Scheme Information Document)
The investment strategy for Aditya Birla Sun Life Nifty 200 Quality 30 ETF will be as follows:
Aditya Birla Sun Life Nifty 200 Quality 30 ETF will be managed passively with investments in stocks in proportion to the weightage of these stocks in the Nifty 200 Quality 30 Index.
The investment strategy would revolve around reducing the tracking error to the least possible through regular rebalancing of the portfolio, taking into account the change in weights of stocks in the index as well as the incremental collections/redemptions in the scheme. Since the Scheme is an exchange-traded fund, the Scheme will only invest in the securities constituting the underlying index. However, due to corporate action in companies comprising the index, the scheme may be allocated/allotted securities which are not part of the index.
Rebalancing of the scheme shall also be carried out whenever there is a change in the underlying index or any change due to Corporate action concerning the constituents of the underlying index within 7 calendar days. The Scheme may also invest in cash and debt/ money market instruments, in compliance with Regulations to meet liquidity and expense requirements.
Under normal circumstances, the asset allocation will be as under:
Table 2: Asset Allocation for Aditya Birla Sun Life Nifty 200 Quality 30 ETF
|Indicative Allocations (% of Net Assets)
|Equity & Equity related instruments constituting Nifty 200 Quality 30 TRI
|Cash, Money Market & Debt instruments
|Low to Medium
(Source: Scheme Information Document)
About the benchmark
The NIFTY200 Quality 30 index includes the top 30 companies from its parent NIFTY 200 index, selected based on their ‘quality’ scores. The quality score for each company is determined based on return on equity (ROE), financial leverage (Debt/Equity Ratio) and earning (EPS) growth variability analysed during the previous 5 years.
The weights of the stocks are derived from their Quality scores and the square root of free-float market capitalization. The stock weight is capped at 5%.
Here’s the list of top 10 constituents by weightage and sector representation under the index as of June 30, 2022:
(Source: NSE Nifty 200 Quality 30 Index)
Note, that the index will rebalance semi-annually in June and December.
Who will manage Aditya Birla Sun Life Nifty 200 Quality 30 ETF?
Mr Lovelish Solanki and Mr Pranav Gupta will be the designated fund managers for this scheme.
Mr Lovelish Solanki holds MMS (Finance) and BMS (Finance) degrees. He has an overall experience of over 10 years in Trading and Dealing. Prior to this, he was associated with Union KBC Asset Management Co. Limited as Equity/Equity Derivatives – Trader and Edelweiss Asset Management Co. Ltd.
At ABSL AMC, Mr Solanki currently manages Aditya Birla Sun Life Index Fund, Aditya Birla Sun Life Arbitrage Fund, Aditya Birla Sun Life Gold ETF, Aditya Birla Sun Life Nifty ETF, Aditya Birla Sun Life Gold Fund, Aditya Birla Sun Life Balanced Advantage Fund, Aditya Birla Sun Life Equity Savings Fund, Aditya Birla Sun Life Sensex ETF, Aditya Birla Sun Life Nifty Next 50 ETF, Aditya Birla Sun Life Banking ETF, Aditya Birla Sun Life Nifty Smallcap 50 Index Fund, Aditya Birla Sun Life Nifty Midcap 150 Index Fund, Aditya Birla Sun Life Nifty 50 Equal Weight Index Fund, Aditya Birla Sun Life Nifty Healthcare ETF, Aditya Birla Sun Life Nifty IT ETF, Aditya Birla Sun Life Silver ETF Fund of Fund, and Aditya Birla Sun Life Nifty Next 50 Index Fund.
Mr Pranav Gupta completed his Master in Management Studies- Finance from N.L Dalmia Institute of Management Studies and Research. He has over 4 years of experience in the capital market across segments such as derivative sales trading and Alternative Research. Prior to joining Aditya Birla Sun Life AMC Limited, he was part of the Alternate Research and Strategy department at Centrum Broking Limited and has also worked with OHM Stock Broker Pvt. Ltd.
At ABSL AMC, Mr Gupta currently manages Aditya Birla Sun Life Nifty 50 Index Fund, Aditya Birla Sun Life Nifty ETF, Aditya Birla Sun Life Sensex ETF, Aditya Birla Sun Life Nifty Next 50 ETF, Aditya Birla Sun Life Banking ETF, Aditya Birla Sun Life Nifty Smallcap 50 Index Fund, Aditya Birla Sun Life Nifty Midcap 150 Index Fund, Aditya Birla Sun Life Nifty 50 Equal Weight Index Fund, Aditya Birla Sun Life Nifty Healthcare ETF, Aditya Birla Sun Life Nifty IT ETF, Aditya Birla Sun Life Silver ETF Fund of Fund, and Aditya Birla Sun Life Nifty Next 50 Index Fund.
Fund Outlook – Aditya Birla Sun Life Nifty 200 Quality 30 ETF
Aditya Birla Sun Life Nifty 200 Quality 30 ETF aims to provide returns that closely correspond to the total returns as represented by the Nifty 200 Quality 30 Index, subject to tracking errors. The scheme endeavours to benefit from factor investing through the Quality factor strategy.
Quality works as a defensive factor to potentially maintain stability across various market cycles. The scheme focuses on the ‘quality’ factor of stocks which can eventually sustain long-term capital growth for your portfolio. The underlying Nifty 200 Quality 30 Index consists of the top 30 companies from its parent NIFTY 200 index, selected based on their ‘quality’ scores. The quality score for each company will be determined based on equal weightage to return on equity, financial leverage (debt/equity ratio) and earnings (EPS) growth variability analysed during the previous 5 years.
The scheme aims to passively invest in high-quality companies and target sustainable earnings, profitability and solvency. In other words, the fund enables investors to access consistently profitable companies with less leverage. Also, the underlying index is predominantly large-cap oriented and provides investors with the benefit to invest in established large caps.
Although the scheme offers investors a diversified portfolio of relatively top 30 Quality Businesses within the Nifty 200 universe, it is still prone to high market risks. The scheme will passively invest in limited high-quality stocks which creates a concentration risk. In addition, the persistent repercussions of the Russia-Ukraine conflict, spiralling inflation and the RBI’s recent announcement to hike policy rates again by 50 basis points to curb demand and control inflation may cause a significant risk to the economic growth and continue the prevailing high market volatility.
The margin of safety appears to be narrow and the clear direction for the equity market from the current elevated levels is uncertain. These factors among others may weigh down the index and its top constituents which may impact the scheme’s performance and the portfolio may face higher volatility in the near term.
The fortune of this scheme will depend on the performance of the underlying index. Thus, this scheme is suitable for investors with a high-risk appetite and a long investment horizon of at least 5-7 years. Ensure your investment objectives align with the fund.