The Hindu Business Line : HDFC Growth: Hold/Avoid fresh exposures

INVESTORS in HDFC Growth Fund can stay invested as its performance is showing signs of picking up. The net asset value is, however, way below the face value of Rs 10 per unit and it may need at least a year or two of good performance and improvement in the level of stock prices for the gap to be bridged. But the performance in the last year has been fairly good in difficult market conditions. The fund appears to have moved to a portfolio weighted with large-cap stocks. This could provide opportunities for value gains if institutional interest picks up and it is this category of stocks that could attract their interest.

Any recovery may be at least six months away (if not more). However, fresh exposures can be avoided till the fund shows a more consistent track record not only in outperforming the markets, but also in protecting NAV levels when gains are made.

The fund has picked up after faltering and seeing the NAV dip sharply over the last year.

Suitability: The HDFC Growth Fund aims at investing in sound companies with good cash flows. The approach is broadly value-based but has not paid off so far.

The investment strategy is also far removed from that of HDFC Tax Plan, where it has used a far more aggressive approach by going in sizeably for mid-cap stocks.

The risks associated with the HDFC Growth Fund are more or less in line with a diversified portfolio and with the markets.

The fund, however, has a short track record of slightly more than two years. Though it has outperformed the market, the returns are far from impressive.

In this backdrop, the HDFC Growth Fund cannot be the first, or even second, choice for investors looking for diversified funds.

Even investors for whom this is only one or one of two equity funds may be better off shifting to other options, such as Zurich India Equity, Bluechip, which have a good track record. Investors can stay with the Growth Option.

Top ten holdings: The top ten holdings of the fund at end-August were BPCL, Infosys, Hero Honda, Ranbaxy, Hindustan Lever, Asian Paints, ITC, SBI, Container Corporation and Tata Engineering.

Portfolio overview: A scrutiny of the portfolio over the last two years throws up the following notable pointers:

The fund started investing its cash in a phased manner and did not plunge headlong into equities. Three months after launch, it had around 40 per cent in cash.

Interestingly, of its first 60 per cent deployment of assets, 36 per cent went to fast moving consumer goods (FMCG) and IT stocks.

The fund has a strong preference for pharmaceutical stocks, which accounted for around 15 per cent of assets for much of 2002. The exposures were stepped up from around 10 per cent in April 2001.

During the same period, the fund shed some of its preference for FMCG stocks, whose weight in the portfolio dipped from a high of 23.2 per cent in April 2001 to 10.6 per cent in August 2002.

IT exposures were also halved from 18 per cent of net assets in November 2001 to around 9 per cent now. So in both the key sectors that formed the cornerstone of the portfolio in the first eight months, the fund had a substantial re-think. These high IT and FMCG exposures have not helped as the stocks saw a downward rating in the last two years.

The fund stuck to the major Indian pharmaceutical companies such as Ranbaxy, Dr Reddy's, Cipla and Sun Pharma and avoided MNC stocks with the exception of Aventis Pharma.

The fund moved into the auto, oil and gas and banking stocks, which collectively account for 26 per cent of net assets now. In the auto sector, the fund has stayed with Tata Engineering, Hero Honda and Bajaj Auto. Though it may have benefited to some extent from the rally in this sector, the downtrend in Hero Honda may have cut into the gains.

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