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Portfolio-Review

HDFC Small Cap Fund came in to existence nearly a decade ago on April 10, 2008. At the time, the fund was known as Morgan Stanley ACE Fund and it followed a multi-cap strategy. In 2013-14, after HDFC Mutual Fund acquired the schemes of Morgan Stanley MF, the investment objective changed and the scheme was rechristened as HDFC Small and Mid-Cap Fund.

A couple of years later, HDFC MF once again changed the name of the fund to HDFC Small Cap Fund, as the fund was predominantly focused on the small-cap segment.

HDFC Small Cap Fund defines small-cap companies as those companies whose market cap is equal to or lower than that of the stock with the largest market cap in the NIFTY Free Float Smallcap 100 Index; while the companies having a market capitalization equal to or lower than that of the stock with the largest market cap in the NIFTY Free Float Midcap 100 Index are defined by the fund as mid-caps.

In terms of performance, the fund generated inconsistent returns post its launch. However, over the past few years HDFC Small Cap Fund has closely tracked its benchmark – the Nifty Free Float Small Cap 100 index. In terms of volatility, the fund has been able to lower the risk and reign in the losses.

HDFC Mutual Fund’s star fund manager Mr Chirag Setalvad has been at the helm of the scheme since June 2014.

In this brief analysis, we take a close look at the features and performance of HDFC Small Cap Fund.

Investment Objective of HDFC Small Cap Fund

HDFC Small Cap Fund has an investment objective to “provide long-term capital appreciation by investing predominantly in Small-Cap and Mid-Cap companies”

HDFC Small Cap Fund Details

Fund Facts
Category Diversified Style Blend
Type Open ended Market Cap Bias Small-cap
Launch Date 10-Apr-08 SI Return (CAGR) 16.37%
Corpus (Cr) Rs 2,670 Min./Add. Inv. Rs 5,000 / Rs 1,000
Expense Ratio (Dir/Reg) 1.15% / 2.35% Exit Load 1%
Data as on February 28, 2018.
SI Return as on March 14, 2018.
(Source: ACE MF)

Under normal circumstances, HDFC Small Cap Fund will allocate…

  • 80% - 100% to Small-Cap and Mid-Cap companies. Of which, 80%-100% will be small-caps and 0-20% will be mid-caps

  • 0% - 20% to other market-cap companies.

  • 0%-20% to debt and money market instruments

Growth Of Rs 10,000, If Invested In HDFC Small Cap Fund 5 Years Back

HDFC Small Cap FundData as on March 14, 2018
(Source: ACE MF)

Had you invested Rs 10,000 in HDFC Small Cap Fund, five years back on March 14, 2013, it would have grown to Rs 29,544. This translates in to a compounded annualised growth rate of 24.18%. In comparison, a simultaneous investment of Rs 10,000 in its benchmark – Nifty FF Smallcap 100 would now be worth Rs 25,885 (a CAGR of 20.94%). The small cap fund has outperformed its benchmark over the period of last 5 years by a decent margin.

HDFC Small Cap Fund: Year-on-Year Performance

HDFC Small Cap Fund has a track record of just about 10 years. The year-on-year performance comparison of the fund vis-à-vis its benchmark – Nifty FF Smallcap 100 shows that the fund has outperformed the benchmark in six out of the last 10 calendar years. In 2014, the performance trailed the benchmark by as much as five percentage points. As seen in the chart alongside, a significant alpha was generated in 2013. In 2013, the fund outscored the benchmark by as much as 15 percentage points.

Year-on-Year-Performance
^SI- April 10, 2008 |*YTD as on March 14, 2018
(Source: ACE MF)


This was at a time when the market had come under pressure. The performance was repeated in 2018 till date. Even though the market headed lower, HDFC Small Cap Fund was able to reduce the losses.

HDFC Small Cap Fund: Performance Vis-à-vis Category Peers

Rolling Period Returns
Scheme Name Corpus (Rs Cr) 1 Year 2 Year 3 Year 5 Year Std Dev Sharpe
SBI Small & Midcap Fund 850 42.54 27.02 31.39 34.06 17.66 0.27
DSPBR Micro-Cap Fund 6206 29.02 24.16 28.76 31.40 17.39 0.20
Reliance Small Cap Fund 6613 42.52 27.66 27.09 32.80 18.93 0.22
Aditya Birla SL Small & Midcap Fund 2070 36.93 27.49 25.80 26.80 17.25 0.20
Franklin India Smaller Cos Fund 7128 27.84 21.88 23.26 30.70 14.31 0.17
Sundaram S.M.I.L.E Fund 1360 33.93 20.27 23.01 26.58 20.65 0.11
DSPBR Small & Mid Cap Fund 5390 29.02 22.22 22.06 24.55 16.73 0.14
HSBC Small Cap Equity Fund 650 32.70 21.21 21.52 24.49 19.56 0.14
Edelweiss Mid and Small Cap Fund 653 30.48 18.21 21.32 26.80 15.78 0.14
HDFC Small Cap Fund 2670 37.63 24.37 21.06 22.60 16.04 0.23
Reliance Mid & Small Cap Fund 3320 27.40 18.35 19.32 24.23 17.14 0.10
Axis Small Cap Fund 441 23.37 16.57 18.63 0.00 13.50 0.11
Invesco India Mid N Small Cap Fund 527 26.75 16.33 18.02 24.69 15.12 0.07
Union Small Cap Fund 308 23.39 12.91 11.71 0.00 16.03 0.05
Nifty Free Float Smallcap 100 - TRI   37.08 23.31 18.22 19.51 22.04 0.09
Returns are on a rolling basis and those depicted over 1-Yr are compounded annualised.
Data as on March 14, 2018
(Source: ACE MF)


*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

On a rolling-return basis, HDFC Small Cap Fund has scored a decent performance when compared to the benchmark. However, more established peers in the space have been able to generate a higher alpha. In the 1-year and 2-year periods, HDFC Small Cap has marginally outscored the benchmark by a few percentage points. Nevertheless, over the longer-term period of 3-years and 5-years, the scheme has generated an acceptable alpha over the benchmark.

In terms of risk, HDFC Small Cap Fund is among the funds with the lowest volatility. The standard deviation, which measures the risk, is much lower than the benchmark and top peers in the category. Thus, HDFC Small Cap Fund ranks high in terms of risk-adjusted performance, even though its returns are on the lower side.

The top five small cap funds based on the 3-year rolling period performance include—SBI Small & Midcap Fund, DSPBR Micro-Cap Fund, Reliance Small Cap Fund, Aditya Birla SL Small & Midcap Fund, and Franklin India Smaller Cos Fund.

Investment Strategy of HDFC Small Cap Fund

HDFC Small Cap Fund seeks to provide long-term capital appreciation by investing in small-cap and mid-cap companies. Small-cap companies are defined as those companies whose market cap is equal to or lower than that of the stock with the largest market cap in the NIFTY Free Float Smallcap 100 Index.

Mid-cap companies are defined as companies having a market capitalization equal to or lower than that of the stock with the largest market cap in the NIFTY Free Float Midcap 100 Index. HDFC Small Cap Fund shall follow predominantly a small cap strategy with a minimum of 60% exposure to small-cap stocks.

HDFC Small Cap Fund may also seek participation in other equity and equity related securities to achieve optimal portfolio construction.  HDFC Small Cap Fund may also invest a certain portion of its corpus in debt and money market securities.

To reduce risk, HDFC Small Cap Fund maintains a well-diversified portfolio. While the portfolio focuses primarily on a buy and hold strategy at most times, it will balance the same with a rational approach to selling when the valuations become too demanding even in the face of reasonable growth prospects in the long-run.

The fund management adopts the below investment approach –

  • Focus on well managed small cap companies

  • Find businesses operating in a niche environment

  • Identify businesses at a relatively early stage in their life-cycle

  • Focus on quality metrics like ROCE & ROE

  • Investments into growth companies with expanding businesses and improvement in profitability

  • Seeking undervalued businesses

HDFC Small Cap Fund - Portfolio Allocation and Market Capitalisation Trends

HDFC Small Cap FundHoldings (in %) as on February 28, 2018
(Source: ACEMF)

Over the past few months, HDFC Small Cap Fund has increased its exposure to cash. The cash levels have increased from about 6% a year ago to nearly 20% in January 2018. As in February 2018, the cash level stands at 15%. Given the high valuations in the mid- and small-cap space, the fund management has reduced the exposure to mid-caps. Midcaps, initially formed about 50% of the portfolio a year ago. However, the allocation has now dropped to around 40%. The weightage to small-caps has ranged between 35%-40% over the past 12 months. Large-caps account for a very small portion of the assets, hovering under 10%.

HDFC Small Cap Fund – Top Portfolio Holdings

Top 10 Stocks
 
Stocks % of Assets
Sonata Software Ltd. 3.68
Redington (India) Ltd. 2.70
Aarti Industries Ltd. 2.62
KEC International Ltd. 2.43
LG Balakrishnan & Brothers Ltd. 2.13
Dilip Buildcon Ltd. 2.13
Power Mech Projects Ltd. 2.11
TV Today Network Ltd. 2.11
Apar Industries Ltd. 2.11
Tata Metaliks Ltd. 2.05
Top 5 Sectors

HDFC Small Cap Fund
Holdings (in %) as on February 28, 2018
(Source: ACEMF)


HDFC Small Cap Fund maintains a portfolio of 68 stocks. The top 10 stocks command a total allocation of 24%. The portfolio is extremely diversified as the weightage of stocks in the top 10 holdings vary from 2%-3% of the portfolio. Among the top 10 holdings are Sonata Software, Redington, Aarti Industries, KEC International and LG Balakrishnan.

Unlike its large-cap peers, finance stocks are nowhere to be seen among the top sectoral holdings. The top sectors include Industrial Products, Auto Ancillaries, Software, Power and Chemicals. Even on a sectoral basis, the allocation is not unfairly skewed to a specific sector or a set of sectors. This level of diversification helps the fund to manage volatility better.

Top Gainers in HDFC Small Cap Fund’s portfolio

Among the top stocks in HDFC Small Cap Fund’s portfolio are Dilip Buildcon, KEC International, Power Mech Projects, LG Balakrishnan & Brothers and Aarti Industries. These stocks moved up by 209%, 150%, 118%, 95% and 51% respectively over the past one year. These stocks are also present in the top holdings.

Among others, NIIT Technologies and VIP Industries were able to double their value over the year. These stocks currently have an exposure of around 1.5% in the portfolio. Evert Industries, which accounts for 0.88% of the assets, returned 174% over the year.

Among the laggards in the portfolio were Apar Industries, Atul Auto, TI Financial Holding, Vardhaman Textiles and The Federal Bank. These stocks generated a return under 10% over the past year.

Suitability of HDFC Small Cap Fund

Small and mid-cap companies offer higher return potential than large cap companies on one hand, but they also carry higher risk, particularly over the short and medium term. The following are some of the reasons why small and mid-cap companies offer higher return potential-

  • Relatively less known by market participants, hence price discovery by market is not full.

  • Better growth prospects due to presence in a new segment/ area of business that is growing at a faster pace.

  • Ability to gain share due to new technology, better products and service etc.

  • Room for P/E multiples to expand if the company transitions from a small / mid cap to large cap, etc.  

You would be aware that small and mid-cap funds are extremely risky. While these funds have the potential of generating supernormal returns, they can lead to deep losses when the market takes a turn. But, a market correction is never the end. As seen in the past, the stock market always finds a way to bounce back up.

But given the extreme valuations, there is a strong probability of a further correction. But when and how much, is another doubt. Hence, to deal with such uncertainty, it is always best to stagger your investments and invest regularly via a Systematic Investment Plan (SIP). You will save yourself from the stress of deciding whether now is a good time to invest in small and mid-cap funds. In addition, if or when the market does move down further, you will get the prefect opportunity to buy more units and lower the average cost of your investment.

HDFC Small Cap Fund invests in a large number of small and midcap stocks, mainly with a motive of long-term growth and capital appreciation. Though the fund has a lower risk than it peers, it has delivered mediocre returns over the past few years. Hence, you need to prudently decide if this fund will be worth your money.

If you opt for small cap funds, do ensure that the fund is in line with your financial goals. If you are not sure about how to align these schemes with your tax planning or financial goals, do consult your financial planner or investment advisor.

Note: This write up is for information purpose and not a recommendation to buy or sell the mutual fund scheme. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor.

Editor's note:

If you’re unsure where to invest fresh investible surplus currently, to strike the correct risk-return trade-off we recommend adopt a ‘core and satellite approach’ to investing. Here are 6 benefits of ‘core and satellite approach’:

  • Facilitates optimal diversification;

  • Reduces the risk to your portfolio;

  • Enables you to benefit from a variety of investment strategies;

  • Aims to create wealth cushioning the downside;

  • Offers the potential to outperform the market; and

  • Reduces the need for constant churning of your entire portfolio

‘Core and satellite’ investing is a time-tested strategic way to structure and/or restructure your investment portfolio. Your ‘core portfolio’ should consist of large-cap, multi-cap, and value style funds, while the ‘satellite portfolio’ should include funds from the mid-and-small cap category and opportunities style funds.

But what matters the most is the art of astutely structuring the portfolio by assigning weightages to each category of mutual funds and the schemes you select for the portfolio. 

Moreover, with change in market outlook the allocation/weightage to each of the schemes, especially in the satellite portfolio, need to change.

Keep in mind: Constructing a portfolio with a stable core of long-term investments and a periphery of more specialist or shorter-term holdings can help to deliver the benefits of asset allocation and offer the potential to outperform the market. The satellite portfolio provides the opportunity to support the core by taking active calls determined by extensive research.

So, PersonalFN offers you a great opportunity, if you’re looking for “high investment gains at relatively moderate risk”. Based on the ‘core and satellite’ approach to investing, here’s PersonalFN’s latest exclusive report: The Strategic Funds Portfolio For 2025 (2018 Edition).

In this report, PersonalFN will provide you with a readymade portfolio of its top equity mutual funds schemes for 2025 that have the ability to generate lucrative returns in the long run. PersonalFN’s “The Strategic Funds Portfolio for 2025” is geared to potentially multiply your wealth in the years to come. Subscribe now! 

 

Jason Monteiro


DISCLOSURE AS PER SECURITIES AND EXCHANGE BOARD OF INDIA (RESEARCH ANALYSTS) REGULATIONS, 2014
 

About the Company including business activity 

Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989. 

QIS was promoted by Mr. Ajit Dayal with an objective of providing value-based information / views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.

'PersonalFN' is a service brand of QIS and was started in the year 1999. In 1999, the Company registered the Domain name www.personalfn.com for providing information on mutual funds and personal financial planning, financial markets in general, etc and services related to financial planning and research in various financial instruments including mutual funds, insurance and fixed income products to customers. It offers asset allocation and researched investment recommendations through its financial planning services. 

Quantum Information Services Private Limited (QIS) is registered as Investment Adviser under SEBI (Investment Adviser) Regulations, 2013 and having Registration No.: INA000000680. In terms of second proviso to Regulation 3 (1) of SEBI (Research Analysts) Regulations, 2014 the Company is not required to obtain Certificate of registration from SEBI.

Disciplinary history

There are no outstanding litigations against the Company, it subsidiaries and its Directors. 

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  1. Money Simplified Services Private Limited;
  2. PersonalFN Insurance Services India Private Limited;
  3. Equitymaster Agora Research Private Limited;
  4. Common Sense Living Private Limited;
  5. Quantum Advisors Private Limited;
  6. Quantum Asset Management Company Private Limited;
  7. HelpYourNGO Private Limited;
  8. HelpYourNGO Foundation;
  9. Natural Streets for Performing Arts Foundation;
  10. Primary Real Estate Advisors Private Limited;
  11. Rahul Goel;
  12. I V Subramaniam.

Disclosure with regard to ownership and material conflicts of interest

  1. Neither QIS, it’s Associates, Research Analyst or his/her relative have any financial interest in the subject Company , except QIS receives fees for providing research to Quantum Equity Fund of Fund (QEFoF) which is Fund of Fund scheme managed by QMF.
  2. Neither QIS, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one per cent or more securities of the subject Company, at the end of the month immediately preceding the date of publication of the research report.
  3. Neither QIS, it's Associates, Research Analyst or his/her relative has any other material conflict of interest at the time of publication of the research report except that QIS (PersonalFN) is, as per SEBI (Mutual Funds) Regulations 1996, an associate / group Company of Quantum Asset Management Company Private Limited and Trustees and Sponsor of Quantum Mutual Fund (QMF) and to that extent there may be conflict of interest while recommending any schemes of QMF. However any such recommendation or reference made is based on the standard evaluation and selection process, which applies uniformly for all Mutual Fund Schemes. The payment of commission (upfront /annualized & trail), if any, for any Schemes by QMF to QIS (PersonalFN) is also at arm's length and as per prevailing market practices

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Subject Company means Mutual Fund Schemes

Quantum Information Services Private Limited CIN: U65990MH1989PTC054667 Regd. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai - 400 021 Corp. Office: 16 Jolly Maker Chambers II, Nariman Point, Mumbai 400 021. Email: info@personalfn.com Website: www.personalfn.com Tel.: 022 61361200 Fax.: 022 61361222

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