Fund Call . HDFC Capital Builder Value: A good choice for value-buying

Stocks across market capitalisations have corrected in recent times. Valuations of many stocks — which had inched up sharply earlier — are moderating now, as a result of the fall.

For investors with a long-term perspective, there are plenty of value-buying opportunities in the market currently. Investors can play this opportunity through value-oriented funds. HDFC Capital Builder Value is one such.

The multi-cap fund took on a value bias following SEBI’s new classification norms.

Benchmarked to the Nifty 500 TRI (Total Returns Index), the fund has a mandate to invest at least 50 per cent of its equity portfolio in stocks whose trailing valuation (price-to-earnings/price-to-book) is lower than the median valuation of the stocks in the benchmark.

Its latest portfolio PE ratio stands at 18.5 times, much below the benchmark’s PE of 24 times.

HDFC Capital Builder lags peer value-oriented funds such as Aditya Birla Sun Life Pure Value and L&T India Value in terms of five-year performance.

But the fund has pulled up its socks in recent years and has bettered most peers in terms of one- and three-year performances.

Strategy

HDFC Capital Builder took some time to warm up to the mid-cap led rally of 2012, having had lower exposure to mid-caps until then. Thus, it underperformed its benchmark that calendar year. But it managed to convincingly beat the Nifty 500 in the subsequent rallies of 2014 and 2017.

To cash in on rallies, Capital Builder holds up to 35 per cent exposure in mid- and small-caps. In 2017, for instance, the fund consistently held at least one-third of its portfolio in mid- and small-caps. At the same time, it is quick-footed to move to safety when the tide turns, as it has done this year.

In 2018, the fund has brought down its mid- and small-cap exposure to 26-28 per cent and also reduced its equity exposure to pare losses.

So far this year, the fund has held only 90-95 per cent in equities. It followed a similar strategy during the iffy markets of 2013 and 2015, too.

Adept choices

Thanks to its strategy of altering its asset allocation and stock choices according to market conditions, the fund has outperformed its benchmark across longer terms of three and five years by 2-4 percentage points. Given the high volatility in the markets this year, its one-year performance is marginally below the benchmark.

But this short-term blip is not a cause for worry. Most peer funds have fared worse in this period.

The fund usually has a well-diffused portfolio, holding 50-60 stocks. But it has been taking a bit of concentrated bet of 8-10 per cent in its top holding — HDFC Bank — over the past two years. The stock’s steady rise in this period, despite all the turmoil in the banking sector, has helped the fund.

Outside of this, the scheme has been holding 3-5 per cent in few bellwether stocks such as ITC, Reliance Industries and Infosys in recent months. Banking stocks — with an increasing preference for private bansk — are the fund’s favourite haunt across market cycles, with it holding 23 per cent in the sector currently.

While the fund cut down on its software holdings in 2017, it has moved up the exposure this year, in time to benefit from bettering prospects and rupee depreciation. While Wipro is a recent addition, HDFC Capital Builder’s other software stocks — apart from Infosys — include solid mid-caps such as Persistent Systems.

Considering the market volatility, stakes in the defensive consumer non-durable space have been moved up this year. It recently added mid- and small-caps such as Chambal Fertilisers, VRL Logistics, INOX Leisure, SH Kelkar, Bharat Financial Inclusion.

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