Fund Call . HDFC Top 100: One for the long haul

Among the relatively better-performing funds in the ongoing market mayhem is old warhorse HDFC Top 100 — HDFC Top 200 until May 2018, before SEBI’s new categorisation rules.

The change, while it led to some realignment in the fund’s portfolio, did not alter the fund’s essential character as a predominantly large-cap fund. A veteran of many market cycles (launched in 1996) and among the largest in its category (corpus of about ₹15,000 crore), the fund remains a good core portfolio choice for a few reasons.

One, its large-cap focus — with mandated investment of at least 80 per cent in the top 100 stocks by market cap — makes it less risky than many other fund categories, a virtue appreciated better in market conditions such as now.

Next, the fund has been a top-quartile performer in the large-cap category in the long term, with annualised returns of about 14 per cent over five years, and 16 per cent over 10 years. HDFC Top 100 has also done better than its benchmark, Nifty 100 TRI, by 1-2 percentage points annualised over five to 10-year periods. This might seem relatively small, but consistent outperformance can mean big jumps in sums over long periods.

With expense ratio (2.27 per cent now for the regular plan) likely to moderate for large fund schemes following SEBI’s directive, the fund’s outperformance could improve in the times ahead. The good long-term record is not to say that the fund always does better than its category and its benchmark. There have been periods of underperformance in the past, when the fund’s bets — for instance, on PSU banking stocks — have been relatively riskier and haven’t paid off in the short run. But the fund has a knack of bouncing back, with its calls paying off when the cycle turns.

Quality picks

This seems to flow from the fund’s focus on high-quality companies, most of them among the largest players in their sectors, giving them the bandwidth to weather tough conditions. The fund’s top 10 stocks account for nearly 60 per cent of the portfolio; this list includes marquee names such as Reliance Industries, Infosys, ICICI Bank, SBI, HDFC Bank, L&T and ITC. The tail is made up of a host of other large-caps and a sprinkling of mid-caps, taking the stock count in the portfolio to a formidable 50 or so.

The fund keeps an eye on valuations in its portfolio decisions, as seen in its timely move to pare and eventually exit from the pricey Maruti Suzuki stock prior to the recent market weakness, and its decisions to increase stake in the beaten-down Power Grid stock. At the same time, the search for value also takes the fund towards some seemingly contrarian bets, such as its long-running fondness for beaten down PSU stocks.

Across market conditions, the fund remains invested almost fully in stocks, with minimal cash positions. Its maximum sector exposure is to banking, followed by software. The fund does not have exposure to pricey consumer goods stocks.

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