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Tuesday, August 2, 2011

Seek opportunities in this HDFC fund

The HDFC Mutual Fund house has been one of the best performers in the Indian market with several 5-star rated funds under management. Some of these funds have track records of 10-15 years. That means they have been through two bull-bear cycles.

However, a younger fund – barely 4 years old – has been performing quite well. The HDFC Mid-Cap Opportunities Fund (HMCOF) caught my eye because of several interesting allocation features in terms of percentage of net assets. These are listed below:

  1. Mid-Cap companies:   70-95%
  2. Small-Cap companies: 5-15%
  3. Other equity/related:  0-25%
  4. Debt/money market:   0-25%
  5. Derivatives (equity/debt): 0-20%
  6. Foreign securities: 0-25%

With such a wide array of investment options, the fund managers - Chirag Setalvad and Miten Lathia (dedicated for overseas investments) - have a lot of lee-way in playing around with different permutations and combinations to achieve optimum returns. What kind of returns have they provided so far?

Not bad at all. One year CAGR  of 11.58%, three years CAGR of 22.85%, and return since inception (in June 2007) of 12.9%. During the bear market period of 2008-09, the fund dropped 38.1%, outperforming its benchmark index CNX Midcap (which fell 45.4%).

One of the problems faced by many small investors is that they have limited capital. The large-cap ‘A’ group stocks appear to be too expensive – both in terms of price and value. Instead of buying a small quantity of a large-cap stock, investors have a propensity to buy larger quantities of mid-cap and small-cap stocks. While such stocks can provide great returns during bull markets, they tend to crash through the floor in bear markets.

The HDFC Mid-Cap Opportunities Fund seems to be tailor-made to solve the above problem. The flexibility of hedging the portfolio through derivatives, and by adding debt/money market instruments and foreign securities helps to protect the down side to an extent.

The fund’s portfolio of mid-cap stocks should make any knowledgeable investor drool. Here are some of the top stock holdings:

  1. Ipca Laboratories
  2. Carborundum Universal
  3. Bata
  4. Lupin
  5. Exide
  6. Vesuvius
  7. Federal Bank
  8. Union Bank of India
  9. TTK Prestige
  10. Tube Investments
  11. Glaxo Consumer
  12. Divi’s Lab
  13. Sundaram Fasteners
  14. Tata Chemicals
  15. FAG Bearings

The fund also holds Crompton Greaves and Biocon, which haven’t performed all that well. A small amount invested regularly in HMCOF gives an exposure to some of the best known mid-cap companies that one can think of.


Jasi said...

Dear Sir,
Your today's post was a welcome change for obvious reason.
I just wanted to throw in another name that I preferred over this fund, IDFC Premier Equity (IPE). The primary reason was I already hold HDFC Equity and im not a fan of holding too many funds from same fund house. IPE has a slightly longer track record and has a very envious 27% returns over a 5 yr period, the best in its class.
Having said that, recent performance of HDFC Midcap Opp, esp one year returns have been far superior. Given the markets have largely been sideways during this time frame, its not a mean feat.

Thanks for the post as always!

Mitran said...

2008 buyouts are good performing till today (especially in midcap segment). this new fund had advantage of starting its buyouts during those period made very attractive return compare to other funds. Anyway, it is good return from the MF now a days.

ekamber said...


If I am not mistaken it has underperformed the bse sensex over the period


Subhankar said...

@Jasi: Thanks for pointing out the IDFC Premier Equity fund, which has also performed very well. I was attracted by the wide variety of investment options available in HMCOF.

It is a good idea not to invest in too many funds from the same house.

@Mitran: You are quite correct about starting a fund at the right time. HMCOF did go through a boom cycle for 6 months when it started and then faced the huge bear market - which it survived quite well.

@ekamber: It is unfair to compare a mid and small cap fund with a large cap index. The benchmark index for HMCOF is the CNX Midcap.

As per HDFC's offer document, HMCOF slightly underperformed the Sensex in the financial year 2008-09, but outperformed the Sensex in 2009-10 and 2010-11.