With veteran money manager Prashant Jain bowing out of HDFC MF, winds of change are blowing at the helm of nearly ₹20,000-crore HDFC Top 100 Fund, the fifth largest actively managed large-cap equity scheme in India. This fund’s investors have got an unique experience of the same manager continuing for about two decades coinciding with multiple market cycles. Since inception, the fund has made investor wealth grow 82 times in over 25 years. Now, the baton passes to Rahul Baijal (ex-Sundaram MF) for steering this giant fund, which only recently started regaining some of its old mojo after forgettable performances in 2019 and 2020. Historically, the fund portfolio, on account of its value style/GARP (growth at reasonable price) bias, has been positioned differently from the large-cap category and that has also led to above-average volatility. As the fund begins a new journey, here is a review.

Fund basics

HDFC Top 100, called HDFC Top 200 till May 2018, was launched way back in October 1996 by Zurich MF (later acquired by HDFC MF). As per its mandate as a large-cap fund, the scheme has to maintain a minimum exposure of 80 per cent to large-cap stocks, which currently are the 100 largest companies in India in terms of full market capitalisation. As of June-end, it had 89 per cent in large-caps, 8.2 per cent in mid-caps and less than a per cent in small-caps.

Generally, large-cap companies are well-established businesses that are in operation for a longer period of time and are well positioned to absorb pressures across various business cycles. Thanks to their size, they also benefit from economies of scale. But since the investible universe for large-cap funds is exactly the same, stock picking and sizing play a even more critical role than ever before in generating alpha (more than benchmark return) on a sustainable basis. In this arena, small mistakes can cost big, and for funds with large asset bases, the path to redemption is trickier.

Strategy and performance

Jain’s long-term approach to investing meant HDFC Top 100 took high conviction positions and held on to them even in the face of market turbulence. This has led to impressive return experiences if you look at three-, five- and 10-year performances; for instance, the fund has outperformed over 80 per cent of the times for these periods on a rolling financial year basis versus its benchmark. Also, it has delivered more than 10 per cent CAGR over 15-year periods in 100 per cent instances since inception in 1996. So, as the holding period increases, return profile improves.

The contrarian streak and differentiated portfolio choices have also sprung spate of underperformance. The fund’s annual record against benchmark in the last decade has been mixed, as can be seen in 2013, 2015, 2019 and 2020, to name a few. In the last four-five years sticking to GARP strategy and a fascination for old-favourite PSU stocks when quality theme was in vogue, cost the fund quite a bit of performance.

In the last one year, HDFC Top 100 has once again zoomed back to top quartile of large-cap category as the easy-money regime came to an end and consequently, beaten-down value stocks staged a comeback much like the proverbial phoenix. Picks such as SBI, ITC, Coal India, NTPC, ONGC, PowerGrid have worked well, helping kick-start the fund’s recent winning streak.

Portfolio positioning

The fund appears to prefer sectors with scope of earnings recovery while going slow on expensive sectors generally.

Compared to benchmark Nifty 100 TRI and peer schemes, HDFC Top 100 maintains a differentiated portfolio. While some peers maintain an index plus strategy, for HDFC Top 100 a distinct portfolio could also be a necessary element given the impact cost for a fund with large asset base.

The fund currently has large overweight (OW) position in corporate banks and financials vis-a-vis the Nifty 100. To reduce sector exposure, it is underweight (UW) retail banks and financials. It is OW in energy, utilities and industrials. After the recent correction when valuations have become a little reasonable, the fund is marginally UW in IT sector now compared to benchmark; this is a change in stance from its significant UW position earlier.

Setting it apart
Compared to benchmark Nifty 100 TRI and peer schemes, HDFC Top 100 maintains a differentiated portfolio

Significant UW positions have been maintained in consumer (discretionary and staples) and materials sectors. In consumer, risk of valuation de-rating seems to be the guiding factor for the fund’s stance. In case of materials, the fund was an investor earlier in the cycle, but has reduced exposure as valuations have increased and fall in commodity prices is a risk.

Going forward, it remains to be seen if HDFC Top 100 will incrementally tweak investment strategy and consequently, its portfolio, with the change of guard. While the new manager is accredited with improving the performance of a focussed large-cap fund at Sundaram MF — but that was a tiny fund compared with HDFC Top 100, which may remain a diversified offering given its asset size.

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