HDFC Mid-Cap Opportunities Fund: Emphasizing on Risk Management - Outside View by PersonalFN

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HDFC Mid-Cap Opportunities Fund: Emphasizing on Risk Management
Dec 18, 2020

The mid cap index has recovered significantly from the lows of March and it has even outperformed the large cap index during this period. Notably, mid cap stocks underperformed the large cap peers in the last three years amid the weak macro-economic conditions, SEBI's norms on the reclassification of mutual fund classification, and COVID-19 pandemic.

Over the past few months, the government and RBI have taken steps to boost economic growth. Thus, the earnings outlook for mid-sized companies has improved.

However, it is advisable to not go overboard to invest aggressively in the mid cap segment because amid the recent rally, valuations in some stocks have turned expensive. Therefore, to get favourable risk-adjusted returns from mid cap space, it is important to invest in selected quality stocks that are reasonably priced in the market.

HDFC Mid-cap Opportunities Fund (HMOF) is a popular mid cap fund that employs sound risk management techniques to curb the downside risk.

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Graph 1: Growth of Rs 10,000 if invested in HDFC Mid-cap Opportunities Fund 5 years ago

HMOF is among those schemes that need no introduction for seasoned investors. Its popularity clearly reflects in its huge corpus size of over Rs 24,000 crore. HMOF has a proven track record of generating above average returns across market conditions and has constantly stood among the list of top performers in the mid cap funds category in the past. In the last 5 years, HMOF has rewarded investors with a CAGR of around 13%, as against 11% delivered by its benchmark Nifty Midcap 100 - TRI index, thus generating an alpha of 2% CAGR. The fund utilises diversification to mitigate downside risk and holds a well-diversified portfolio comprising of fundamentally sound growth oriented companies in the mid and higher mid cap segment. The fund manager resists from following market momentum and holds each of his high conviction stock for the long term.

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Table: HDFC Mid-cap Opportunities Fund's performance vis-a-vis category peers
Scheme Name Corpus (Cr.) 1 Year (%) 2 Year (%) 3 Year (%) 5 Year (%) 7 Year (%) Std Dev Sharpe
Axis Midcap Fund 7,878 25.08 19.85 14.95 16.32 21.97 19.14 0.14
Quant Mid Cap Fund 20 38.89 17.44 11.85 12.15 13.22 22.75 0.085
Invesco India Midcap Fund 1,142 25.02 15.09 9.02 14.73 21.36 22.51 0.071
DSP Midcap Fund 9,467 25.2 17.53 8.57 15.32 21.47 22.07 0.062
Kotak Emerging Equity Fund 8,654 23.11 16.21 7.58 15.15 22.93 24.41 0.054
Taurus Discovery (Midcap) Fund 59 25.43 13.12 7.37 13.3 18.87 21.91 0.04
Edelweiss Mid Cap Fund 1,023 28.35 16.43 6.49 13.31 21.7 24.74 0.043
Franklin India Prima Fund 7,026 18.8 11.63 5.61 12.47 19.66 23.28 0.03
HDFC Mid-Cap Opportunities Fund 24,215 23.15 11.73 4.7 12.95 19.7 24.74 0.019
L&T Midcap Fund 6,180 19.89 9.52 2.98 13.03 21.44 23.33 -0.001
Nifty Midcap 100 - TRI 23.22 9.4 2.14 10.99 16.59 27.67 0
Returns are point to point and in %, calculated using Direct Plan - Growth option. Those depicted over 1-Yr are compounded annualized
Data as on December 15, 2020
(Source: ACE MF)

*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

HMOF currently figures among the above-average performers. It has distinctly outperformed its benchmark (Nifty Midcap 100 - TRI) by a noticeable margin across most time periods. Though HMOF has trailed some of the other popular peers in the mid cap category, it stands strong in the list of mid cap funds, and has constantly generated an alpha of around 2 percentage points compared to the index.

The fund has not only demonstrated its ability to generate superior returns for its long term investors, but it has also been reasonable when it comes to managing volatility and curtailing down-side risks. Its standard deviation (24.74%, annualised) is significantly lower than that of its benchmark (27.67%, annualised) as well as many of its category peers. In terms of risk-adjusted returns as denoted by the Sharpe ratio, HMOF has outperformed its benchmark, though it lags behind the category average.

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Investment strategy of HDFC Mid-cap Opportunities Fund

Categorised under midcap funds, HMOF is mandated to invest at least 65% of its assets in equity & equity related instruments of mid cap companies, defined as 101st to 250th stock on full market capitalisation basis.

The non-midcap exposure in the portfolio can go up to 35% of its assets. Accordingly, HMOF invests in stocks of predominantly mid-sized companies, which have reasonable growth prospects at acceptable valuations. It follows the bottom-up approach to identify high quality businesses for the long term. The stocks are bought primarily for the strengths of the company's fundamentals rather than the strength of the macro-economic indicators.

HMOF holds a well-diversified equity portfolio of around 65-80 stocks and prefers to stay invested in each of its holdings with a long term view. Following a buy-and-hold investment strategy, the fund manager refrains from unnecessary churning in the portfolio and avoids chasing momentum.

Moreover the cautious approach helps the fund perform during uncertain market phases, which is well reflected in its margin of outperformance, especially during bear phases. The fund usually remains fully invested across market cycles, taking very limited cash calls, thus allowing it to reduce the margin of error.

Graph 2: Top portfolio holdings in HDFC Mid-cap Opportunities Fund

Being a large-sized midcap biased fund, HMOF's portfolio usually comprises of 65-80 stocks, where its exposure to single stock is limited well within the 5% mark. As on November 30, 2020, HMOF held around 71 stocks in its portfolio, with some popular mid cap names like Balkrishna Industries, Cholamandalam Investment & Finance Co., Aarti Industries, Ipca Laboratories, Sundaram Fasteners, Voltas, etc. appearing among its top portfolio holdings. The top 10 stocks together account for around 35% of its portfolio.

HMOF's bets on stocks like Balkrishna Industries, Ipca Laboratories, Divi's Laboratories, Aarti Industries, Tube Investments of India, Trent, Cholamandalam Investment & Finance Co, Torrent Pharma, Atul, etc. have turned out to be rewarding for HMOF in the last one year.

About 19% of HMOF's portfolio is currently exposed to Banking and Finance stocks. Consumer Durables, Auto Ancillaries, Engineering, Pharma, Chemicals, Infotech, and Consumption follow closely behind with an allocation in the range of 3% to 12%. The top 5 sectors in the fund's portfolio together account for around 60% of its assets.

Suitability

HMOF's focus on long term growth opportunities in mid-sized segment enables the fund manager to invest in stocks with high intrinsic value, allowing the fund more time to realize the growth potential of its investments. HMOF employs sound risk management techniques that has helped it do well to curb the downside risk. Moreover, its performance on the upside has been in line with that of the benchmark. The fund has done well under its manager Mr Chirag Setalvad who has been managing the fund for over a decade now. HMOF is suitable for long term investors looking for a relatively stable and reliable fund in the mid cap segment.

PS: If you wish to select worthy mutual fund schemes, I recommend that you subscribe to PersonalFN's unbiased premium research service, FundSelect.

Additionally, as a bonus, you get access to PersonalFN's popular debt mutual fund service, DebtSelect.

PersonalFN recommendations go through our stringent process that assesses both quantitative and qualitative parameters, providing you with Buy, Hold, and Sell recommendations on equity and debt mutual fund schemes.

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Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

Author: Divya Grover

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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