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Fund Analysis: HDFC Midcap Opportunities Fund
Sat, Nov 28, 2015
Source : Khyati Shah, Citrus Interactive

HDFC Midcap Opportunities Fund is an open-end diversified equity mid cap fund. The Fund aims to achieve long term capital appreciation by investing predominantly in equity & equity related instruments of Small and Mid-cap companies. The fund was launched in June 2007 and is benchmarked against the CNX Midcap Index. The fund has an AUM of Rs.10,589 crores as on October 31, 2015 which is gone up by 2,664 crores as compared to the last year October 31, 2014 (7,925 crores).

 

Performance:

HDFC Midcap Opportunities Fund has a very good performance track record of consistently outperforming its benchmark index and the equity diversified category average across all time frames as shown from the table given below except for YTD and 6 months returns where it has underperformed its benchmark index. Its performance since inception has been better that its benchmark by over 6.82 percentage points. And in the time horizon of 1, 2 and 3 years it has clearly been in the top quartile of its peer-set.

Scheme Name

YTD

6 Months

1 Year

2 Years

3 Years

Since Inception

HDFC Midcap Opportunities Fund (G)

3.88

3.66

13.95

43.12

29.14

17.14

CNX Midcap

5.2

4.33

11.8

32.6

19.49

10.32

Category Average

2.99

1.74

7.94

29.04

21.06

NA

Rank

70/158

39/161

34/158

20/148

21/145

NA

Figures are in % as on October 31, 2015; Returns above 1-year in Compounded Annual Growth Rate (CAGR)

When we look at the calendar year returns it’s quite clear that this fund has beaten its category average and benchmark in all the last five calendar years. The fund has been in the top quartile of its peer-set in four of the last five years (excluding the year 2012 where it was in second quartile).

Scheme Name

2010

2011

2012

2013

2014

HDFC Midcap Opportunities Fund (G)

32.13

-18.31

39.62

9.64

76.63

CNX Midcap

19.16

-31

39.16

-5.1

55.91

Category Average

19.18

-23.95

34.05

5.43

53.99

Rank

4/131

17/138

37/142

21/146

32/149

All figures in %

Risk Measures:  In terms of measures of risk such as standard deviation & beta (average of the last three years) the fund has a much lower level of risk compared to the category median. This is quite commendable given its focus on mid cap securities which are relatively more volatile.

 

Standard Deviation

Beta

HDFC Midcap Opportunities Fund (G)

0.88

0.71

Category Median

0.95

0.89

Figures are in % as on Oct 31, 2015

Risk adjusted Returns: The fund’s risk adjusted performance as measured by Treynor ratio and Sharpe ratio (measured as average of last three years) is superior to the category median.


Sharpe

Treynor

HDFC Midcap Opportunities Fund (G)

0.11

0.14

Category Median

0.08

0.08

Figures are in % as on Oct 31, 2015;

 

Portfolio Characteristics:

Sector Concentration:  The fund’s concentration in the top 3, 5 and 10 sectors is significantly lower than the category median highlighting lesser risk of the fund.

 

Top 3

Top 5

Top 10

HDFC Midcap Opportunities Fund (G)

27.28

38.16

57.09

Category Median

37.67

50.34

71.43

 

Company Concentration: The concentration of funds in top 3, 5 and 10 companies in its portfolio is also significantly lower than the category median highlighting lesser risk of the fund.


Top 3

Top 5

Top 10

HDFC Midcap Opportunities Fund (G)

7.84

12.61

22.72

Category Median

19.38

27.75

45.19

Lesser Sector & Company Concentration signifies the low risk profile of the fund.

Number of equity holdings: The fund currently holds 72 stocks in its portfolio (Oct 31, 2015), which is much higher than the median stock count for the diversified-equity category, which currently stands at 45. Thus, based on equity count the fund runs a diversified portfolio compared to its peer set. Since Inception the fund has always had a diversified portfolio with the number of equity holdings averaging around 59.

The top 5 sectors in the portfolio had an allocation of 38.16% which is lower than the category average of 49.46%. The top 5 sector include Finance - NBFC, Pharmaceuticals & Drugs, Refineries, IT – Software and Air Conditioners.

The fund’s exposure to cyclical stocks currently is 68.46% followed by Services with 13.55% & Defensives with 12.44%. The Top five holding are Bajaj Finance Ltd., Torrent Pharmaceuticals Ltd., Aurobindo Pharma Ltd., Divis Laboratories Ltd. and Hindustan Petroleum Corporation Ltd.

In the last six months there has been very little churn in the portfolio. The fund has brought stocks of MRF Ltd., Trent Ltd and Lakshmi Machine Works Ltd. Whereas stocks of Nirvikara Paper Mills Ltd., TTK Prestige Ltd., and Emami Ltd. have been dropped from the portfolio.

Based on criteria such as equity count, sector concentration and company concentration, one can conclude that the fund runs a well-diversified portfolio.

 

Process:

HDFC Midcap Opportunities Fund is an open-end diversified equity fund, which aims to achieve long term capital appreciation by investing predominantly in equity & equity related instruments of Small and Midcap companies. Atleast 75% of the funds will be invested in equities & equity related instruments of small & midcap companies and a maximum of 25% can be invested in equity & equity related instruments other than mid and small cap companies or Debt/Money Market instruments. The fund investments in midcap companies will range between 75% - 100% while the range of investments in small cap companies will be in a range of 0-25%. The fund may also seek investment opportunities in foreign securities including ADRs / GDRs / Foreign equity and debt securities upto a maximum of 25% of the net assets of the Scheme.

Small and Mid-Cap companies offer higher return potential than large cap companies but they also carry higher risk than large cap companies, particularly over the short and medium term. Therefore to reduce risk the fund maintains a well-diversified portfolio.

The fund’s expense ratio is 1.75% which much lower with category average of 2.38%. Like most equity funds the fund has an exit load of 1 per cent on or before one year from the date of investment. Minimum investment in the fund is Rs 5,000.

 

Fund Manager:

Mr.Chirag Setalvad has been working as a Senior Fund Manager – Equities. He has over 16 years of experience of which 13 years in Fund Management and Equity Research and 3 years in investment banking. He is a B.Sc. in Business Administration from University of North Carolina. From March 2007 till date he is with HDFC AMC. He has also worked with New Vernon Advisory Services Pvt. Ltd., HDFC AMC, ING Barings N.V. Other funds managed or co managed by him are HDFC Capital Builder Fund, HDFC Balanced Fund, HDFC Children’s Gift Fund, HDFC Long Term Advantage and HDFC Multiple Yield Fund – Plan 2005 (equity assets).

Mr. Rakesh Vyas has been working as a Fund Manager - Foreign Securities and Senior Equity Analyst in HDFC AMC since October 2009. He has over 9 years of experience of which 3 years in Application Engineering (Control & Automation) and over 5 years in equity research. He is with HDFC AMC from Oct 2009 till date. He has also worked with Nomura Financial Advisory and Securities Pvt. Ltd., Lehman Brothers Services India Pvt. Ltd., GE Power Controls India Pvt. Ltd., Larsen & Toubro Limited. Mr.Vyas acts as the dedicated Fund Manager for Overseas Investments for all eligible Schemes of HDFC Mutual Fund.

 

View:

HDFC Midcap Opportunities Fund has an excellent performance track record across all time horizon and market cycles. We like the fund consistency to outperform the benchmark and category average across all market cycles.

HDFC Mid-Cap Opportunities Fund provides a heavily diversified portfolio. Inspite of being a mid/small cap fund, the fund has managed to contain the risk by significant diversification in stocks/sectors without diluting its performance. The low expense ratio, stable management and ability to curtail losses in a tough market make it a good investment.

However, the fund has now grown to a size of almost Rs 11,000 crores and it will be difficult for the fund manager to take concentrated bets in midcap stocks without impacting the price of stocks that he is buying or selling. If he chooses to diversify his holdings more (he currently holds 72 stocks in the portfolio), extraordinary gains will be limited. We therefore expect at best the fund to outperform its bench mark index (CNX Midcap Index). It may not be a repeat its flamboyant performance of the past.

 
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