Inexpensive isn’t worthless always. For instance, sunshine is a free and abundant source of energy, and so as the wind, but humans relied on fossil fuels for centuries.
Only in the last 10-15 years, the awareness about using renewable energy sources has gained popularity.
According to International Energy Agency (IEA), renewable sources contributed close to 18% of power generated globally, in the year 2000. This share went up to 20% by 2010—just a 2% rise in 10 years. However, renewable energy now accounts for 28% of the total electricity generation globally.
If somebody looked at the pace of growth in the decade ending 2010 and concluded that renewables have no future, how wrong they would have been proved in the subsequent decade!
So is the case with investing. Quite often, expensive stocks are regarded as ‘must-haves’ in a portfolio. No matter how much downside risk they might expose investors to.
On the other hand, inexpensive counters are often treated as ugly ducklings and remain ignored for a long time. But once the potential is recognized and accepted by the broader market, the subsequent re-rating happens quite quickly.
Value investing is a school that finds beauty in deserving but neglected stocks that are quoting at cheap valuations.
At present, there’s a divide amongst mutual funds—some are going with the flow and others are against the tide.
HDFC Top 100 is one such fund that dares to see beyond what’s visible to an ordinary investor.
This is what best describes HDFC Top 100 Fund…
Being a value investor means you look at the downside before looking at the upside.—Li Lu
Historically, the fund has avoided betting on overheated stocks and has believed in following sensible valuations. With such strategies, the fund could avoid infrastructure stocks in the run up to the 2008 financial crisis and invest in FMCGs. It steered clear of IT stocks during the dotcom boom and loaded up on capital goods companies. As a culmination of these strategies and impressive track record, the fund became one of the most sought-after large cap funds.
However, owing to its investment style, the ranking of HDFC Top 100 Fund in the category of large cap funds has been inconsistent. At times, you may find this fund amongst the top 5 funds and on a few occasions even in the bottom 5.
At present, HDFC Top 100 has been going through one of the most difficult phases since its inception, especially considering the returns it has generated over the last 12-18 months. Its recent performance has not only affected the fund’s short term returns but the sharp fall experienced in March dragged the long term performance as well.
The fund has been overweight on corporate banks, utility companies, energy, and manufacturing companies. These are some of the beaten down but attractively valued sectors. As per the portfolio disclosed on July 31, 2020; top 5 sectors constituted 69% of the portfolio.
HDFC Top 100 Fund has been betting on businesses that may make headlines in times to come, rather than just focusing on the price and earnings performance in the recent past. The fund has invested aggressively in PSUs—a theme that has got battered in the market over the last 18-24 months.
The fund holds a top-heavy-long-tail portfolio. Although it spreads its investments across 50-55 stocks on an average, the top 20 holdings constitute a bulk of its portfolio. As on July 31, 2020, HDFC Top 100 Fund had 51 stocks in its portfolio, of which 21 were PSU companies. The total exposure to PSU companies was 29.9%. The top 20 stocks accounted for 75% of the portfolio.
We recently caught up with Team HDFC Mutual Fund to understand its assessment of the current market conditions, and in that context, the positioning of the fund.
The future of HDFC Top 100 depends primarily on two factors—value investing finding favour again among investors and markets witnessing a broad base rally.
The return of value investing essentially means, investors keeping off expensive and low growth stocks and betting on those having a decent earning visibility and a remote scope for value erosion. The relative underperformance of expensive FMCG companies during the times of pandemic suggests that finally some sanity is coming back to the market.
1. Investments in corporate banks, utility companies, undervalued PSU stocks and disinvestment stories may help the fund immensely if the tide turns for these companies. Let’s not forget some PSU names offer a dividend yield higher than that offered by a 10-year government bond. Many of them have reported decent numbers in Q4FY20 as well as Q1FY21.
2. In the assessment of HDFC Mutual Fund there’s been a silent admission by the government that ETF wasn’t an effective route for disinvestment. Just one successful strategic deal can open floodgates to future deals.
3. As stated by the fund house, it is focused on investing in companies that are less likely to have suffered any significant impact of the pandemic on their earnings and have scope for re-rating.
4. Mr Prashant Jain—CIO of HDFC Mutual Fund—has been managing HDFC Top 100 Fund (erstwhile HDFC Top 200 Fund) since its inception. His vast experience of last 25 years in Indian markets, long-term orientation and ability to spot undervalued companies is a big positive for the fund.
If investors remain wary of value investing even in future, the fund may continue to underperform. Moreover, the pace of disinvestment also holds the key, as also the performance of PSU companies outside the disinvestment theme, since nearly 30% of HDFC Top 100 Fund’s portfolio is held in PSU stocks.
An all-round assessment of HDFC Top 100 Fund suggests that the odds are still in the favour of the fund. Every bull market creates new winners. The next one year may prove quite eventful for the Indian markets. Under such circumstances, it remains interesting to see how HDFC Top 100 Fund performs.
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