HDFC Prudence: The risks are high, so are returns

Investors wary of taking full exposure to equities at this juncture could consider HDFC Prudence — a balanced fund. It takes aggressive exposure to equities compared to other balanced funds; over the last last five years its equity exposure has remained in the range of 71-75 per cent. Its peers, Franklin Balanced (65 per cent), Birla Balanced (66 per cent) and ICICI Balanced Advantage (53 per cent), have relatively lower exposure to equities.

In the last one year, the fund delivered top-notch returns. Equity markets, as measured by the Sensex, were up 19 per cent in the last year. During this period, the fund managed to deliver a return of 38.7 per cent as against an average return of 24.3 per cent for the category.

The fund has a penchant for mid-cap stocks and maintains a multi-cap orientation, thereby increasing its risk (as well as return) quotient. The fund did hit a bad patch in the year 2015 — when its higher exposure to cyclical stocks didn’t pay off. However, with cyclicals such as steel and banks bouncing back in 2016, it managed an excellent performance.

The fund has a history of 22 years, with its fund manager Prashant Jain managing the scheme since inception. With an asset size of ₹16,469 crore, it is also the largest balanced fund in the country.

State Bank of India (delivering 44 per cent return), Tata Steel (85 per cent) and Larsen & Toubro (31 per cent) were among the largest contributors to the fund’s overall returns in the last one year. In the past, the fund has maintained a bias towards banking stocks, which paid off. In contrast, IT stocks such as Infosys (down 20 per cent), Aurobindo Pharma (down 18 per cent) and Sanghvi Movers (35 per cent) were a drag on its overall performance.

During the year, the fund took fresh exposure to Adani Ports & Special Economic Zone, NTPC and Cairn India while exiting the counters of Axis Bank, BPCL and Birla Corporation.

The fund is relatively overweight on financials, energy and tech as compared to its peers, while remaining underweight on healthcare and FMCG. State Bank of India (6.9 per cent), Larsen & Toubro (6.7 per cent) and ICICI Bank (6.4 per cent) are its top three stocks, while financials, diversified and energy remain its top sectors, in that order.

Last year, the fund manager took higher interest rate risk on the debt portfolio, which paid off. The fund currently has a modified duration (cash-flow adjusted maturity of its debt portfolio) of 6.1 years. Holding long-tenure bonds helped the fund rake in returns in the last one year when rates on benchmark 10-year G-Secs fell 120 basis points. However, since February this year, interest rates have inched up by more than 40 basis points. As of January 31, the fund had 10 per cent of its overall portfolio in G-Secs. ‘AA’ rated instruments and those rated ‘A’ and below comprised another 9.2 per cent and 2 per cent, respectively. Among bonds, State Bank of India (3.1 per cent), Canara Bank (2.3 per cent) and Union Bank of India (1.8 per cent) were its top holdings.

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