This fund remains a solid offering in our view, despite recent stumbles.
HDFC TaxSaver's recent showing has been poor. In 2012 (till Nov), the fund has underperformed the category average by 6 percentage points, lagging 90% of its tax-saving peers. Nevertheless, we believe the recent showing is an anomaly rather than the norm, for many reasons.
Chiefly, the fund is managed by Vinay Kulkarni, who is an experienced and competent manager. He is backed by HDFC's strong and stable investment team, and we view the team quite highly for its research capabilities. Kulkarni is well-ingrained into the HDFC investment philosophy and has a reasonably strong track record. Hence, we are relatively unperturbed by the fund's recent underperformance.
The investment process is also key to our favourable view here: Kulkarni plies a multi-cap approach, investing roughly 60% in large caps and the remaining 40% in small/mid-caps. Like all managers at HDFC Asset Management Company, he places strong emphasis on understanding the business and has an inherent quality bias when investing in companies. His investments typically span a two- to three-year investment horizon. However, it isn't uncommon to feature stocks in the portfolio for significantly longer time frames. This is also borne out by the fund's low turnover ratios (30% as of March 2011 and 25% as of March 2012).
We think Kulkarni's focus on the long-term strength of a business is a positive and it complements his style of investing for the long haul. Kulkarni also takes large stock and sector bets, often against the grain. We believe this is linked to the research-intensive approach and the caliber of the investment team, which helps pull off such a strategy. Overall, we are fairly impressed with his investment style and solid execution of the investment process. We also note that the process is well-defined and repeatable.
That said, certain risks associated with the investment process need to be highlighted. Kulkarni's big bets can result in severe underperformance in the short term. His valuation consciousness also can hold back the fund versus peers when markets are rewarding speculative fare. The fund's poor performance in 2007 when stocks in overheated sectors such as power utilities, real estate, and metals were the season's flavour is a case in point. Nevertheless, we believe that over longer time frames when markets experience a cycle, the manager's investment style and expertise will hold the fund in good stead. We reiterate the fund's Silver rating.
Morningstar Analyst Rating™
Core. The fund's large-cap bias and impressive risk-return profile makes it suitable as a core holding.
Vinay Kulkarni is a competent manager who is supported by a strong investment team.
HDFC AMC is among the biggest and, we believe, best asset managers in the country.
Kulkarni typically scouts for quality stocks, with a strong emphasis on valuations.
Under Kulkarni, the fund has a good track record across risk and return parameters.
The fund's price is lower than that of the median offering in the ELSS category.