Why HDFC Equity Fund Disappointed Its Investors    Aug 02, 2018


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HDFC Equity Fund needs no introduction— it's popular with a performance track record spanning more than two decades. However, despite being one of the largest equity funds in India, HDFC Equity Fund is fast losing its charm after a substantial slowdown in performance over the last few years.

Traditionally a flexi-style fund, it has always had the privilege to switch market cap exposure depending on available opportunities. However, the fund preferred to be inclined more towards large caps along with significant exposure to mid-caps. Keeping in mind the fund's historical strategy, the fund house has classified HDFC Equity Fund under Multi-cap Funds category, which allows it to diversify across market caps without limitations to any specific segment. This is very much in line with its historical investment style.

An offering from India's largest fund house, HDFC Mutual Fund, known for its investment systems and processes and with a well seasoned fund manager like Prashant Jain at the helm, HDFC Equity Fund can be easily entrusted with investors' money. However, the fund has clearly disappointed its investors over the last few years with sub-standard returns compared to its peers. Over a 3-year rolling return basis, HDFC Equity Fund has not only lagged behind on the category average but also its benchmark, the Nifty 500 - TRI Index. Moreover, the excess volatility seen in the fund's performance raises concern about its consistency and stability.

Having an objective to generate capital appreciation / income from a portfolio, predominantly invested in equity & equity related instruments, HDFC Equity Fund carries a weightage of at least 70% into large caps, with about a quarter of its portfolio in mid-cap stocks. Driven by the conviction of its fund manager, the fund has in the past managed to reward investors with a higher risk appetite and a longer time horizon.

Fund Facts – HDFC Equity Fund

Category Multi Cap Fund Style Blend
Type Open ended scheme Market Cap Bias Multi Cap Fund
Launch Date 2-Jan-95 SI Return (CAGR) 19.22%
Corpus (Cr) Rs 20,352 Min./Add. Inv. Rs 5,000 / Rs 1,000
Expense Ratio (Dir/Reg) 0.96% / 1.96% Exit Load 1%
Portfolio Data as on June 30, 2018.
SI Return as on July 31, 2018.
(Source: ACE MF)

Growth Of Rs 10,000, If Invested In HDFC Equity Fund 5 Years Ago

Invested In HDFC Equity Fund
Data as on July 31, 2018
(Source: ACE MF)

An investment of Rs 10,000 in HDFC Equity Fund 5 years back, would now have appreciated to Rs 26,031. A simultaneous investment of Rs 10,000 in the benchmark Nifty 500 – TRI index would have grown to Rs 23,334. With a CAGR of around 21%, HDFC Equity Fund has outperformed the benchmark by about 2.5 percentage points over its benchmark (18.5% CAGR). However, the margin of outperformance is not very significant, compared to peers that have beaten the index by over 5 percentage points over the same time period.

HDFC Equity Fund: Year-on-Year Performance

Year-on-Year Performance
YTD as on July 31, 2018
(Source: ACE MF)

Being in existence for over two decades, HDFC Equity Fund holds a superior long term track record. Over the last 5 years, the fund has been seen lagging the benchmark and category peers in a down trending and markets, but has managed to sail past its peers during follow up recoveries and market rallies. The year-on-year performance comparison of the fund vis-à-vis Nifty 500 - TRI shows that the fund has fallen short of the benchmark in 4 out of the last 10 calendar years, especially when the markets were under pressure. The bouts of underperformance shown by the fund is another concern among its investors.

HDFC Equity Fund: Performance Vis-à-vis Category Peers

Scheme Name Corpus
(Rs Cr)
1 Year (%) 2 Year (%) 3 Year (%) 5 Year (%) Std Dev Sharpe
Motilal Oswal Multicap 35 Fund 13,016 24.92 24.64 20.63 -- 14.33 0.14
SBI Magnum Multicap Fund    5,413 21.24 20.59 16.39 22.14 13.14 0.13
Principal Multi Cap Growth Fund 661 26.68 25.21 16.29 22.24 16.60 0.12
Aditya Birla SL Equity Fund    9,351 19.24 23.22 16.28 23.17 13.70 0.14
Invesco India Multicap Fund 524 23.65 21.23 15.86 26.24 15.27 0.10
Kotak Standard Multicap Fund 19,827 20.01 21.33 15.70 22.11 12.75 0.15
Mirae Asset India Equity Fund    7,945 22.41 21.75 15.22 21.98 13.36 0.14
BNP Paribas Multi Cap Fund 854 23.02 20.18 14.64 20.45 14.39 0.06
Parag Parikh Long Term Equity Fund    1,107 21.23 17.77 13.98 20.04 10.07 0.19
Edelweiss Multi-Cap Fund   87 25.99 21.21 13.46 -- 14.94 0.11
ICICI Pru Multicap Fund    2,753 14.83 17.85 13.10 19.69 12.27 0.10
Franklin India Equity Fund 11,470 16.58 16.04 12.77 20.04 11.76 0.07
DSPBR Equity Fund    2,503 19.81 19.88 12.51 18.68 15.15 0.08
HSBC Multi Cap Equity Fund 612 19.53 19.55 12.31 20.37 14.81 0.07
IDFC Multi Cap Fund    5,484 18.75 15.53 11.94 20.80 13.75 0.04
IDBI Diversified Equity Fund 363 18.00 14.41 11.49 -- 12.28 0.05
L&T Equity Fund    2,689 19.10 17.88 11.47 18.55 13.42 0.07
HDFC Equity Fund 20,352 19.03 19.99 10.89 18.07 16.62 0.05
Baroda Pioneer Multi Cap Fund 673 17.42 16.67 10.34 16.25 13.51 0.02
UTI Equity Fund    7,986 18.14 15.13 10.22 17.38 12.48 0.11
Canara Rob Equity Diver Fund 852 21.39 17.48 10.14 15.79 14.40 0.06
Reliance Multi Cap Fund    9,270 20.02 14.98 9.14 18.06 14.93 -0.01
Taurus Starshare (Multi Cap) Fund 210 15.73 15.11 8.72 14.43 14.60 -0.01
Union Equity Fund 212 14.72 13.83 6.35 12.86 13.03 0.00
LIC MF Multi Cap Fund 264 10.98 11.04 4.70 11.90 15.45 -0.05
NIFTY 500 - TRI 20.81 19.09 11.75 16.40 13.30 0.10
Returns are on a rolling basis and those depicted over 1-Yr are compounded annualised.
Data as on July 31, 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.

HDFC Equity Fund has turned out to be a below average performer. Although the fund has managed to beat the benchmark over longer time periods of 5 years, it has failed to deliver over shorter rolling periods of up to 3 years. Moreover, the fund has lost its spot of being a top quartile category performer. HDFC Equity Fund's standard deviation of over 16% is one of the highest in the category, which raises doubt about its risk management strategies; while its Risk Adjusted Return (Sharpe Ratio) is nothing to boast of. It clearly signifies that the conviction of the fund manager has not really worked for the fund in the last few years. In fact the fund manager needs to focus on controlling the excess volatility encountered by the fund, which results in higher risk for its investors.  

Investment Strategy of HDFC Equity Fund

Classified under multi-cap funds, HDFC Equity Fund holds mandate to invest across market caps. However, the fund holds a predominantly large cap portfolio with dynamic allocation to mid caps. While picking stocks, the fund gives high preference to strong & growing companies that could not only survive, but emerge stronger in challenging times. Moreover, the fund's portfolio remains diversified across key sectors, with focus being on stocks and sectors where the fund manager has high conviction. HDFC Equity Fund fund largely follows a blend of growth and value style of investing and does not churn its portfolio often. It prefers to remain fully invested into equities and does not take any aggressive cash calls.

In terms of stock picking, HDFC Equity Fund is driven by processes and depends predominantly on bottom up approach to pick quality stocks for its portfolio. The fund usually follows buy and hold investment strategy, where the fund manager sticks to his conviction irrespective of themes that become the short-term flavour of the markets.

HDFC Equity Fund - Portfolio Allocation and Market Capitalisation Trends

Portfolio Allocation
Holdings (in %) as on June 30, 2018
(Source: ACEMF)

Given its huge size of over Rs 20,000 crore, HDFC Equity Fund lacks flexibility to quickly shift its portfolio allocation. Over the past year or so, the market cap allocation has remained almost steady. The exposure to large-caps has remained around 80% while mid and small caps have been below the 20% mark. Over the last 6 months the funds allocation to midcaps has slighlty shifted towards large caps. This is probably due to the rally in the large cap space, while the mid caps have corrected significantly. The cash levels have remained below 3% for most part of the year. Despite holding a portfolio with high large-cap allocation, HDFC Equity Fund has failed to keep its volatility under check. The funds high volatility is mainly because of its concentration to a specific set of sectors and stocks, and not being truly diversified.

HDFC Equity Fund – Top Portfolio Holdings

Top 10 Stocks

Stocks % of Assets
State Bank Of India 9.56
Infosys Ltd. 9.41
ICICI Bank Ltd. 8.91
Larsen & Toubro Ltd. 8.32
Reliance Industries Ltd. 5.46
HDFC Bank Ltd. 4.92
NTPC Ltd. 3.23
ITC Ltd. 3.18
Power Grid Corp. Of India Ltd. 2.80
GAIL (India) Ltd. 2.68

Top 5 Sectors

Top 5 Sectors
Holdings (in %) as on June 30, 2018 (Source: ACEMF)


As on June 30, 2018, HDFC Equity Fund's portfolio was invested over 49 stocks. The fund's portfolio is skewed towards stocks where the fund manager holds high conviction. Stocks like State Bank of India, Infosys, ICICI Bank and Larsen & Toubro, carry an exposure of over 8% each and together account to about 36% of the assets. Reliance Industries and HDFC Bank are the other two stocks in the portfolio where the exposure is about 5% each. The top 5 and top 10 holdings in the fund's portfolio account for 42% and 59% of its assets respectively, which may result in high concentration risk and volatility if any of its top pick is out of favour or changes tide.

Clearly, banks lead the list of sectors with an allocation of 30%, while NBFCs account for another 4% in the portfolio, together allocating one third portion of the fund's portfolio into financials. I.T., Industrial Capital Goods and Power stocks follow behind with an allocation of over 10% each. Petroleum sector stocks gain an allocation of about 7%. Around 75% of the fund's portfolio is currently exposed to these 5 sectors.

Major Gainers: Over the last one year, stocks like Avenue Supermarts, TCS, Reliance Industries and Infosys have been among the top performers in the funds portfolio, gaining over 40% in value.

Major Losers: On the other hand, KSK Energy Ventures, Gammon Infrastructure, Hindustan Construction Co., Siti Networks, BEML, Oriental Bank Of Commerce and Punjab National Bank, are among the stocks present in the fund’s portfolio, that lost over 40% in value.

Suitability of HDFC Equity Fund

Multi cap funds provide the benefit of diversification across market caps. In the absence of any limit on market cap segment, HDFC Equity Fund may not carry equal weightage to each market cap segment. It is expected to operate more like a pre-dominant large cap fund. While its focus towards large cap stocks may help during turbulent market conditions, its concentrated bets into few selected stocks and sectors could lead to additional volatility and lower returns if the stocks don’t perform as per the fund manager’s expectations or if any of the underlying themes remain out of favour. The fund has shown tendency to underperform its peers as well as the benchmark during extreme market conditions.

The aggressive investment strategy followed by HDFC Equity Fund makes it suitable only for investors who are willing to consider higher risk and ignore short term underperformance, while keeping patience with the fund for long term growth.

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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 financial planner or investment advisor.

Author:Vivek Chaurasia


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