HDFC Mid-Cap Opportunities Fund: Pulling Through Tough Times
Nov 21, 2019

Author: Divya Grover

HDFC Mid-Cap Opportunities Fund Pulling Through Tough Times
(Image source: photo created by snowing - freepik.com)

Mid-caps have been under pressure in the last 2 years, while many midcap stocks still continue to be beaten down as a result of the persistent slowdown in the economy. Nevertheless, the valuations in the midcap segment seem to be more attractive compared to their large cap counterparts.

With more reform measures and announcements by the government to revive the market sentiment and boost economic growth, stocks of many mid-sized companies may turn out to be beneficiaries and may rise in the years to come. By picking and sticking to quality mid cap names, mutual fund managers can be in a position to reward investors with better risk-adjusted returns when the tide turns in the favour of this segment.

HDFC Mid-cap Opportunities Fund (HMOF) is one such mid cap fund which predominantly invests in mid-sized companies having reasonable growth potential at acceptable valuations.

The fund was launched in June 2007 and has the largest corpus in the mid cap fund category. It is managed by Mr Chirag Setalvad (since inception) who has close to 20 years of experience in fund management and equity research. Mr Chirag Dagli is the dedicated fund manager for overseas investment since July 2019.

Graph 1: Growth of Rs 10,000 if invested in HDFC Mid-cap Opportunities Fund 5 years ago

HMOF has performed reasonably well despite the sharp volatility witnessed in the mid cap segment over the last couple of years. Had you invested Rs 10,000 five years back on November 19, 2014 in HMOF it would now be worth Rs 16,022 (as calculated on November 19, 2019). This translates into a compounded annualised growth rate of 9.89%. In comparison, a simultaneous investment of Rs 10,000 in its benchmark Nifty Midcap 100 - TRI would have grown to Rs 14,614 (a CAGR of 7.88%). The fund has generated moderate lead over the benchmark in the last five years.

Graph 1: Growth of Rs 10,000 if invested in HDFC Mid-cap Opportunities Fund 5 years ago
 
Data as on November 19, 2019
(Source: ACE MF)

Graph 2: HDFC Mid-cap Opportunities Fund’s year-on-year performance
 
Graph 2: ABSLFEF year-on-year performance
 
*YTD as on November 19, 2019
(Source: ACE MF)

Launched in June 2007, HMOF has a track record of over 12 years to its credit. Its year-on-year performance comparison relative to its benchmark Nifty Midcap 100 - TRI shows that the fund outpaced the index in 6 out of last 10 calendar years. Its outperformance in most years was in the range of 11 to 18 percentage points. The funds ability to restrict the downside risk has been impressive. In the on-going correction phase which began in January 2018, the fund has outdone the benchmark with a noticeable margin.

 

Table 1: HDFC Mid-cap Opportunities Fund's performance vis-a-vis category peers

Scheme Name Corpus (Cr.) 1 Year (%) 2 Year (%) 3 Year (%) 5 Year (%) Std Dev Sharpe
Axis Midcap Fund 3,551 5.60 13.97 14.45 17.28 14.15 0.16
L&T Midcap Fund 5,831 -7.85 3.78 13.17 19.12 16.00 0.04
Sahara Midcap Fund 8 -3.76 2.66 12.68 14.77 16.29 0.03
Invesco India Midcap Fund 621 -0.92 8.15 12.62 17.72 15.84 0.07
Kotak Emerging Equity Fund 5,341 -3.22 4.72 12.00 19.74 15.79 0.03
DSP Midcap Fund 6,691 -2.76 4.38 11.96 17.55 15.63 0.03
Taurus Discovery (Midcap) Fund 51 -6.67 4.81 11.24 15.46 16.38 0.03
Nippon India Growth Fund 6,632 -2.16 5.26 11.10 14.09 15.62 0.02
HDFC Mid-Cap Opportunities Fund 22,637 -6.35 3.43 11.08 16.81 15.80 -0.01
ICICI Pru Midcap Fund 1,847 -5.43 4.23 10.88 15.87 15.23 0.01
Franklin India Prima Fund 7,510 -2.85 4.98 10.83 17.58 14.30 0.02
Tata Mid Cap Growth Fund 747 -0.17 5.57 10.65 16.81 17.46 0.05
Edelweiss Mid Cap Fund 945 -7.73 5.13 10.50 17.46 16.77 0.03
Sundaram Mid Cap Fund 5,883 -9.51 0.18 8.38 16.08 16.29 -0.05
BNP Paribas Mid Cap Fund 757 -6.07 1.69 8.15 15.33 16.60 0.00
Baroda Mid-cap Fund 47 -8.56 2.33 7.85 4.15 15.95 -0.03
Aditya Birla SL Midcap Fund 2,356 -9.82 -0.15 7.81 15.05 16.50 -0.06
Motilal Oswal Midcap 30 Fund 1,625 -3.44 1.58 7.00 15.06 16.88 -0.01
UTI Mid Cap Fund 3,745 -9.56 1.07 6.67 14.90 16.92 -0.04
Quant Mid Cap Fund 11 -3.85 5.52 6.49 8.81 13.50 0.01
Nifty Midcap 100 - TRI -10.11 0.42 8.68 13.52 18.66 -0.03
Returns are on a rolling basis and in %, calculated using Direct Plan - Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on November 19, 2019
(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.
 

HMOF performed better than the benchmark across rolling periods. However, it lagged the category average in each of the rolling period, though with a lower margin.

The fund stood behind the top performers in the mid cap category such as Axis Midcap Fund, L&T Midcap Fund, Sahara Midcap Fund, Invesco India Midcap Fund and so on but managed to stay ahead of many other peers.

In terms of risk-return profile, HMOF registered volatility nearly in line with the category average though lower as compared to the benchmark. While it managed to deliver better risk-adjusted returns as compared to the benchmark, the average category risk-adjusted returns were higher.

Investment strategy of HDFC Mid-Cap Opportunities Fund

HMOF predominantly invests in equities of mid cap companies with a minimum exposure of 65% of its assets. It also seeks to participate in other equity and equity related securities to achieve optimal portfolio construction. Given the higher volatility of mid caps, the fund lays strong emphasis on risk management.

The fund aims to build a portfolio of mid cap companies which have:

  • Reasonable growth prospects

  • Sound financial strength

  • Sustainable business models

  • Acceptable valuation that offers potential for capital appreciation

It aims to maintain a reasonably diversified portfolio at all times. The fund has the flexibility to invest a portion of its corpus in debt and money market instruments as well as units of REITs and InvITs.

Graph 3: Portfolio allocation and market capitalisation trend in HDFC Mid-cap Opportunities Fund

Graph 3: Portfolio allocation and market capitalisation trend in HDFC Mid-cap
 
Holding (in %) as on October 31, 2019
(Source: ACE MF)

Categorised as a mid-cap fund, HMOF is mandated to hold at least 65% of its assets in equity and equity related instruments of mid cap companies. Accordingly, the fund allocates 65-70% of its assets in mid cap companies. In the last one year the fund has reduced its allocation to the highly volatile small caps from 27% to around 17% at present. Meanwhile, the allocation to the more stable large caps has been increased to 8% from 2-4% earlier. The fund’s cash and debt holding is usually in the range of 7-10%.





 


Graph 4: Top portfolio holdings in HDFC Mid-cap Opportunities Fund

Graph 4: Top portfolio holdings in HDFC Mid-cap Opportunities Fund Graph 4: Top portfolio holdings in HDFC Mid-cap Opportunities Fund
Holding (in %) as on October 31, 2019
(Source: ACE MF)

HMOF held a diversified portfolio of 71 stocks as on October 31, 2019. The top 10 stocks constitute 31.6% of the portfolio with investment across sectors. Cholamandalam Investment & Finance Company has the top allocation of 4.4%, followed by Aarti Industries, Voltas, Balkrishna Industries, Sundaram Fasteners and City Union Bank with allocation in the range of 3-4% each. Rest of the stocks in the top 10 holdings have allocation in the range of 2-3%.

In terms of sector the fund has the highest exposure to Finance at 11.7% with another 9.3% in Banks. Auto Ancillaries, Consumer Durables and Engineering have the next highest allocation with exposure of around 10.5% each. Pharmaceuticals, Chemicals, Infotech and Consumption are the other prominent sectors in the portfolio.

Top contributors

Among the stocks in the portfolio, Trent Ltd. contributed the most to the fund's gains in the last one year with a weighted return of 1.4%. Reliance Nippon Life Asset Management, Aarti Industries, Voltas, Whirlpool of India, City Union Bank and Cholamandalam Investment & Finance Company were the other major contributors to the portfolio gains. Most of these stocks are part of the fund's top holdings.

On the other hand stocks like Arvind, RBL Bank, Glenmark Pharma, Balkrishna Industries, Indian Bank and Exide Industries eroded some of its gains.

Suitability of HDFC Mid-cap Opportunities Fund

HMOF holds a well-diversified midcap biased portfolio and has showcased sound performance over the years. While the fund's volatility is within fair limits, the fund manager needs to focus on improving the risk-adjusted returns for its investors. Mid-caps have the potential to outshine large caps over long term, though the risk involved is higher. This makes HMOF suitable only for aggressive investors with high risk appetite and investment horizon of at least 5 years.

Note:  This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. 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. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

Editor's note:  The last few years have not been among the best for equity mutual funds. While most funds have underperformed or are struggling to match the returns of the benchmark, there are few funds that have the potential to constantly generate alpha for its investors. And we have identified five such high alpha generating funds, in our latest report 'The Alpha Funds Report 2019'. Do not miss our latest research finding. Get your access to this exclusive report, right here!

 

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 the 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, its subsidiaries and its Directors.

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Details of associates

  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.com India Private Limited;

  8. HelpYourNGO Foundation;

  9. Natural Streets for Performing Arts Foundation;

  10. Primary Real Estate Advisors Private Limited;

  11. HYNGO India Private Limited;

  12. Rahul Goel;

  13. I V Subramaniam.

Disclosure with regard to ownership and material conflicts of interest
  1. ‘subject company’ is a scheme on which a buy/sell/hold view or target price is given/changed in this Research Report;

  2. Neither QIS, it's Associates, Research Analyst or his/her relative have any financial interest in the subject Company; except for one of the research analyst holding units of HDFC Mid-cap Opportunities Fund.

  3. 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;

  4. 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.

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