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An equity-oriented balanced fund with nearly a fourth of its portfolio in debt instruments, HDFC Prudence has delivered a stellar 66 per cent return over the past year − among the best in the category. This is thanks primarily to the fund’s significant exposure to small- and mid-cap stocks (nearly 30 per cent of the portfolio), which are among the biggest gainers in the ongoing bull market. HDFC Prudence has been quite successful in the long run too. Its average annual return since inception 20 years back in 1994 has been an enviable 19 per cent. It has consistently bettered its benchmark (Crisil Balanced Fund), with out-performance in the range of 6 to 31 percentage points over the past one-three years. Also, HDFC Prudence has figured in the top quartile in its category over longer time periods.
Yet, the fund may be only suitable for investors with a stomach for risk. While the fund has consistently outperformed its category in buoyant markets, the same cannot be said about its performance in a weak market despite significant debt exposure. In nearly all the bear market phases since 2008, the performance of HDFC Prudence has been worse than the category average. The fund’s risky bets on smaller stocks, which pay off handsomely when the going is good, become a drag when the tide turns.
Last year, the fund was quick off the block increasing its exposure to cyclical sectors such as banks and autos and reducing holdings in defensive sectors such as software.
Latching on to cyclicalsRich pickings in small- and mid-cap stocks such as Sundram Fasteners, Atul Ltd and HSIL, which have quadrupled or quintupled over the last year, also boosted returns. Over three- and five-year periods too, the fund has benefited from multi-bagger small stocks such as Balkrishna Industries and Aarti Industries.
The bulk of the debt investments of HDFC Prudence are in government securities (18 per cent of the total portfolio), which have done well in recent months. The fund has moved away from corporate debentures, a significant holding until two years back. The fund is nearly fully invested, as has been the case most times in the past.
Currently, banking stocks have the largest share (19 per cent) in the fund’s portfolio. This should help if the economy turns around as expected.
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