HDFC Equity: A bet on economic recovery

HDFC Equity, which is among the largest equity funds in India, with assets in excess of ₹17,000 crore, has seen a slowdown in performance in the last one year.

Over the past year the fund has not only lagged the category average but also its benchmark, the Nifty 500 Index. The fund’s NAV has slipped by over 4 per cent over a one-year time frame, even as the Nifty 500 declined less than 3 per cent.

The fund’s strategy of increasing exposure to the beaten down stocks in sectors such as public sector banks, infrastructure and industrials, as a bet on economic recovery, has led to the recent spell of underperformance. Many peer funds have opted to have a higher exposure to non-cyclical sectors such as consumer discretionary and pharmaceuticals as a defensive proposition, with the view that profit recovery could take some time. In the market rally of the last couple of years, sectors and companies with secular earnings prospects have been sharply re-rated while cyclicals as a class have lagged. It is this trend which has impacted HDFC Equity’s relative returns.

Despite the recent show though, the fund has managed to retain its mid quartile position over a three- and five-year frame by delivering returns 2-3 percentage points higher than its benchmark during this period. While fresh investments can be avoided at this point, those who are holding units of HDFC Equity can remain invested.

In the past, the fund did manage downsides during market falls. For instance, during the 2008-09 and 2010-11 corrections, the slide in the scheme’s NAV was much lower than its benchmark. However, during the January-August 2013 fall, the fund lost over 21 per cent, much higher than the 16 per cent decline witnessed in the Nifty 500. This was due to higher exposure to cyclicals in anticipation of an economic turnaround.

On the consistency front, the fund ranks above average. In the last five years, the fund’s annual returns have been better than the benchmark 60 per cent of the time. This is, however, lower than that of peers such as Franklin India Prima Plus and Mirae India Opportunities.

This is largely on account of the scheme’s underperformance over the last five months. This was due to the scheme’s bets in the banking space — allocation to this sector has increased to 30.5 per cent in September from 27.8 per cent in May. Increasing exposure to stocks, such as Oriental Bank of Commerce, Axis Bank, Canara Bank, Punjab National Bank and State Bank of Bikaner and Jaipur, impacted performance. These stocks have lost 12-40 per cent since May.

Similarly, stocks in the construction and infrastructure space also played a part in the scheme’s slack performance. For instance, stocks such as Hindustan Construction Company, Gammon Infrastructure and KSK Energy Ventures have shed 30-40 per cent in the last five months. As the fund has continued to stick with its cyclical positioning, the fund’s portfolio price-earnings multiple is low in comparison to peers, at 16-17 times against 21-22 times for rivals. However, the fund’s contrarian view peg up the risk, in the event the recovery does not materialise soon.

The fund’s good track record of wealth creation over the long term argues for older investors to hold on to the fund. Investors who would like to bet heavily on the recovery theme would find it a good addition to their portfolio.

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