HDFC Top 200 and HDFC Equity have had a bad run this year. So it will probably surprise many that our fund analyst has reiterated the Gold rating for both funds. But before you protest, bear in mind that Morningstar always takes a long-term view of the funds under scrutiny.
Granted, even in the 3-year and 5-year return time periods, the funds are not shooting out the lights. But they do make their mark in the 10-year period. Which is extremely telling of the fund manager’s style – he is more than willing to endure short-term pain so as not to comprise on long-term integrity.
Both funds are managed by Prashant Jain and both fall into Morningstar’s Large-Cap category. With this as a common foundation, there will be some similarities in both funds.
He refrains from finding refuge in cash when the market tanks. Indeed, that is the time he scouts for good bargains.
His preference for public-sector companies is also evident. His conviction often stems from the economies of scale they enjoy and barriers to entry in the business in which they operate. He believes PSU banks such as SBI will be major beneficiaries of India’s long-term structural growth. So despite hurting performance, this stock holds a dominant place in both portfolios.
What distinguishes the two funds from each other is the investment universe. HDFC Top 200 tracks the S&P BSE 200 while HDFC Equity is benchmarked against S&P CNX 500. Jain does not completely disregard the benchmark but does attempt to stay true to the fund’s calling by keeping an eye of the index’s constituents. But before you cry foul, these are not index funds.
He does not shy from taking bets on stocks and sectors in excess of index exposures to generate the excess alpha. For instance, in HDFC Top 200, financial services accounted for about 36% of assets versus the index (29%) in July 2015. His picks in SBI and Infosys in both portfolios are definitely overweight the index.
Where he tends to hug the benchmark more closely is when he cannot find value in the market and valuations are stretched.
Ironically, it appears that he tends to take more concentrated bets in HDFC Equity, though the fund’s assets under management (AUM) are more compared to HDFC Top 200. The top 10 equity holdings account for 54% of the portfolio; it is around 49% for HDFC Top 200. HDFC Top 200 also has 10 more stocks than its sibling, despite a lower AUM. (October 2015 portfolio).
So should this year’s performance deter investors?
There have been occasions in the past where the fund has hit a roadblock but it has never failed to make a convincing comeback. In 2006 and 2007, the funds underperformed the category average but stood vindicated in 2009 and 2010. In 2011, the funds faltered but again climbed the performance charts in 2012. In 2013, once again they underperformed the category average only to beat it the next year.
The reason that senior fund analyst Himanshu Srivastava has reiterated the Gold ratings for both funds is because he is convinced of the fund's ability to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over the long term. And despite hitting rough patches now and then, his conviction in the solidity of the offerings has not wavered.
Investors must remember that Jain sticks to his conviction. He did not get carried away by the tech bubble in the late 1990s, and the bubbles in real estate and infrastructure in 2007. This only goes to indicate that there will be times when the market punishes him for his stance, but it is not long before he bounces back.
Being incredibly diligent with his research, his focus is on bottom-up stock picks keeping the macro perspective in mind.
For a brief analysis click here:
HDFC Equity
HDFC Top 200
