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   HDFC Top 200 Fund – Low Risk Low Return

Quick review of the fund various parameters

Particulars

Details

Remarks

Fund PE

28.57

The trailing PE of the fund is on the higher side when the fund is mirroring the index. This is so because the Index PE is itself nearing 20 on the trailing basis.

Price to Book Value

7.17

The Price to Book of the BSE SENSEX is around 3.4 and here also the top 200 fund appears to be a trifle higher

Average Market Cap

Rs 25,105.12 crores

This is in line with the fund’s stated policy. A Highly market capitalized portfolio will do well in turbulent times as it does not fall as quickly as the mo\id cap portfolio.

Net Assets

1082.16

A large corpus does not affect  a large market cap fund.

Sharpe Ratio

0.52

This is not very high and should be moderately better then average

Beta

0.96

The fund closely follows the index and is equally volatile.
                                                                                 Source: Valueresearchonline.com,

The AMC team at the HDFC Mutual fund recently made a pitch for investing in its HDFC top 200 fund. The fund is a classic combination of large caps and would mostly mirror the broader indices. John Neff the pioneer of index investing would have been thrilled to see the working of the fund. I reproduce below the statements made by the AMC team with specific reference to the Top 200 fund.

Equity markets – outlook 
•          At present, P/E is around 16x on 1 year forward earnings; this is reasonable & in line with past average and sustainable level of growth in corporate earnings  
•          Economic growth in India, which has sustained in all types of environment, looks set to accelerate now, particularly given the sharp increase in capital spending; several projects in planning stage which individually will be 0.5-1% of GDP. 
•          India has decades of growth left, as penetration levels of consumer goods and services are below even developing countries; further exports look set to accelerate in manufactured goods as well after the success of services exports which is well known now. 
•          Correlation with global markets is a short term phenomenon due to common investors and some common pools from which India receives a part of inflows;  not expected to last over long term as Indian growth is not dependent on world economic growth to any material extent. 
•          Growth drivers in India are quite structural in nature and sustainable; no obvious risks to economic growth including global slow down 
•          Once again, a reasonable outlook for equities over the long term;  limited room for P/E expansion;  interest rates hold the key. 
•          One positive fall out of market correction is improvement in quality and pricing of IPO’s

Fund specific features of the HDFC Top 200 fund 
 A well diversified equity product

In the nature of an Index + fund (active + passive ) ; internal guidelines of matched positions with the index 
Focus on GARP (growth at reasonable price) for active positions 
Limited exposure to mid caps;  avoids large individual positions in mid - caps 
Offers portfolio diversification comparable to market indices, but has superior  historic returns* (refer to slide on returns
  Favorable equity environment for top 200 Fund 
a)      No significant and apparent anomalies in valuations across sectors
b)      This should make beating the benchmark more difficult in the future than   
            has been the case in the past *
* Past performance may or may not be sustained in future. Please refer slide for performance table. 

Risks are more sector specific than macro in this market
a)      IT- margin pressures, currency
b)      Commodities – fall in commodity prices
c)       Auto – sensitivity to interest rates
d)      Pharma – event led 
e)      Capital goods – slow down in growth rates
f)        Consumer – slow down in growth rates etc

A well diversified portfolio in such an environment reduces risk 
a)      At present valuations, where next one year’s growth is discounted in markets, outlook for future returns is moderate 
b)      In such an environment, it makes sense to reduce portfolio risk by diversification : Top 200 Fund is by design always well diversified, hence is a lower risk product compared to less diversified funds 
c)      Well defined Investment universe primarily comprising   BSE 200 companies and TOP 200 capitalized companies ONLY supports good quality of portfolio, which also reduces risk

Two key aspects

–         Improve the quality of the portfolio, by investing in higher quality, more competitive, more sustainable businesses

–         Focus  on  secular growth companies compared to cyclicals; this strategy reduces risk on one hand and improves chances on positive returns over long term

Well diversified Portfolio

Sector

Select Companies 

% of holding

Consumer Non Durables

ITC, Hindustan Lever

15.93

Software

Infosys, TCS

14.23

Banks

SBI, BOB

8.47

Industrial Capital Goods

BHEL, Siemens, Crompton Greaves

8.12

Oil

ONGC

8.09

Total

54.84

* As on June 30, 2006

                    Top 200 Fund Returns from 1997-2005

Period

HDFC Top 200 Fund (%) 

BSE 200
(%) #

Last 1 year

49.69*

37.69*

Last 3 years

54.25**~

41.10**

Last 5 years

44.45**

28.86**

Since Inception $

27.31**

15.48**

* Past performance may or may not be sustained in future. Please refer slide for performance table. 

This is how your investments would have grown if you had invested  Rs. 1,000 systematically on the first business day of every month over a period of time

Details 

Since Inception

5 Years

3 Years

1 Year

Total Amount Invested (Rs.)

1,17,000.00

60,000.00

36,000.00

12,000.00

Market Value (Rs.)

6,04,023.71

2,01,119.50

66,995.72

13,666.46

Returns (annualized) * (%) ^

31.78

50.68

44.92

26.93

Benchmark Returns (annualized) (%) #

20.13

34.68

32.40

19.42

Recommendation: The fund marits investment for people low risk low return investors. The large market cap along with Index based diversification reduces the risk along with the return.  Investors looking to invest in bulk should invest into this fund through a six month S.I.P. This fund is a better version of an Index fund. The primary reason why Indian fund managers are consistently able to best the broader indices is that Indian indices especially the BSE SENSEX is loaded in favor of a few stocks (Reliance, Infosys, ITC). The HDFC Top 200 fund should give above average market returns.

While I do not have any investments in this fund my clients could be invested in the HDFC Top 200 fund.

Edited by basant - 25/Jul/2006 at 8:39am