HDFC Capital Builder: A capital choice for the game investor

The fund plays mid- and small-cap stocks across market cycles

Valuations have moved beyond comfort level in the mid-cap space and these stocks may be subject to corrections in the near to medium term. For investors wary of investing in mid-cap funds now, HDFC Capital Builder offers a good alternative.

While it is classified as a multi-cap fund, HDFC Capital Builder does not entirely stick to the flavour of the season as all multi-cap funds normally do. Instead, this fund constantly holds about 20-30 per cent in mid- and small-cap stocks across market cycles.

This helps perk up returns when the market is in a positive mood. In times of bearishness or volatility, the fund increases its cash/debt exposure to cut losses, rather than reduce mid/small-cap exposure.

This approach has stood the fund in good stead in the last five years. Over one-, three- and five-year periods, the fund has outperformed its benchmark — the Nifty 500 index — by 3 to 5 percentage points. The returns over one-, three- and five-year periods are better than that of peer Franklin Flexi-Cap. Over three and five years, HDFC Capital Builder has done better than other multi-cap funds such as HDFC Equity as well.

The fund also shows a one-year rolling return of 91 per cent over the last five years, scoring full marks on consistency of performance. It is a good fit for the portfolio of investors with appetite for a bit of risk.

Strategy

HDFC Capital Builder took some time to warm up to the mid-cap-led rally of 2012, having had less than 10 per cent exposure to mid-caps until then. Thus, it underperformed its benchmark that calendar year. But it managed to beat the Nifty 500 in the years that followed — be it during the volatile markets of 2013, 2015, 2016 or the rally of 2014.

Its constant mid-cap exposure of 20-30 per cent helped during the 2014 bull market. In a volatile 2013, it had only 91-93 per cent in equities for a good part of the year. Similarly, it held less than 95 per cent in equities for some time during the choppy markets of 2015. In recent months, the fund has again increased debt exposures, holding only 93 per cent in equities in its latest portfolio (as of April 2017). But it continues to holds about 27 per cent in mid/small cap stocks.

Portfolio choices

The fund prefers banks and software for its top sectors across market cycles. It also increases exposure to defensives, such as consumer non-durables or pharma during uncertain times. However, in the last one year, considering the headwinds in both the software and the pharma space, the fund has cut holdings here by 2-4 percentage points. Its top bets include HDFC Bank, Axis Bank, SBI, ICICI Bank and Infosys, although it has trimmed its exposure to most of these, barring Axis Bank, in the last few months.

It seems to be betting on a pick-up in the infrastructure and construction segments of the economy, with bets on stocks such as Larsen & Toubro, Adani Ports, Dilip Buildcon and J Kumar Infraprojects. Improving consumption has seen the fund raise stakes in consumer non-durables too, with ITC and Dabur added since February 2017.

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