As the election fever reaches a peak, it is important not to lose sight of 2 things in your investment life – your own goals and your investment time frame, plus the fundamentals of the market and the economy.
The former, of course, means that your choice of whether to invest or not, or when to invest does not even arise when you have certain fixed commitments to meet over a fixed time frame. In other words, external factors should not determine your savings/investments.
Hence, the issue of whether to invest before the elections or post the election results, in our opinion, does not exist if you need to work towards a goal. You simply need to invest in avenues that help you build the required wealth.
That said, your choice of investments can vary, either based on the fund’s performance (when it comes to mutual funds), or based on the opportunities that sector and the changing economic scenario throw up.
It was in relation to the second point – that is changing fundamentals of the economy and sectors – that we came up with our strategic call in March. You can click here to read it. It was, of course, not meant to be an election bet. Rather, it was chosen based on fund portfolios that we believed held more potential at this point.
Of the funds chosen there, we mentioned HDFC Top 200 as a dark horse play. We had a few investors asking us about the fund’s underperformance in 2012-13. Our choice of the fund was more based on the scheme’s portfolio potential and the improving performance, its chequered record over the past 2 years notwithstanding. In this weekly call, we seek to review the fund a bit more in detail.
Performance & Suitability
To know if HDFC Top 200 fits you, it is important to understand the fund’s characteristics. One, HDFC Top 200 is a diversified fund with a large-cap bias; but, it takes an exposure of 15-20% to mid-cap or nascent large-cap stocks as well. This makes it a tad riskier than most pure large-cap funds.
Two, HDFC Top 200 certainly does not score as high as many other large-cap funds in terms of containing risks. In other words, the fund takes a hard knock in down markets even as it outperforms in market rallies. Just to illustrate this point, in the last 5 years, the maximum knock the fund took (1-year fall) was 24% as against funds such as ICICI Pru Focused Bluechip Equity or UTI Opportunities that fell by 16%.
On the other hand, the highest 1-year return over the same 5-year period was 129% for the fund, as against 113-115% for the funds mentioned above. In other funds, HDFC Top 200 is a high beta fund and can be highly volatile over short-to-medium time frames. The last couple of years were cases in point.
Three, HDFC Top 200’s fund manager, Prashant Jain, is known to stick to his guns when it comes to his conviction calls on certain stocks/sectors. This may mean not touching certain sectors even as they rally, or sticking to an underperforming stock – case in point being the fund’s still-top holding – SBI (the stock was an underperformer for a good part of 2013 but rallied 34% in the last 6 months). That means, you might see the fund go contrary and therefore underperform in certain phases.
Despite it volatility, the fund has beaten its benchmark, S&P BSE 200, 80% of the times on a rolling one-year basis for the last 5 years. This record is not way off the 82% statistics of a similar nature for UTI Opportunities when compared with its own benchmark, S&P BSE 100.
Of course, in the last 3 years, HDFC Top 200 underperformed its benchmark more number of times as a result of its sector and stock bets that are only now beginning to work.
In all, HDFC Top 200 may not be the right fund for a beginner’s core portfolio. While its long-term returns compensate investors for such risks, its volatility may not appeal to a new investor. We have recommended HDFC Top 200 as a strategic call, based on its portfolio. We believe that its portfolio, which has a good dose of cyclical sectors, is well placed to qualify from any improvement in the economy.
HDFC Top 200 has maximum weight to the banking and financial services sector, with SBI being the top stock. Exposure to IT, energy, auto and consumer non durables also means that the fund has a fine mix of cyclical as well as defensive sectors.
Capital good stocks such as Siemens and Crompton Greaves, as well as cement plays such as Grasim Industries and Century Textiles & Industries all point to a portfolio strategy that is waiting for an economic recovery. While we do not expect the fund to benefit simply because the market is factoring a revival, over a three-year period, these sectors and stocks are likely to provide a sufficient upside on improved domestic capex spending.
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