Mid-caps have been under pressure in the last 2 years, while many midcap stocks still continue to be beaten down as a result of the persistent slowdown in the economy. Nevertheless, the valuations in the midcap segment seem to be more attractive compared to their large cap counterparts.

With more reform measures and announcements by the government to revive the market sentiment and boost economic growth, stocks of many mid-sized companies may turn out to be beneficiaries and may rise in the years to come. By picking and sticking to quality mid cap names, mutual fund managers can be in a position to reward investors with better risk-adjusted returns when the tide turns in the favour of this segment.

HDFC Mid-cap Opportunities Fund (HMOF) is one such mid cap fund which predominantly invests in mid-sized companies having reasonable growth potential at acceptable valuations.

The fund was launched in June 2007 and has the largest corpus in the mid cap fund category. It is managed by Mr Chirag Setalvad (since inception) who has close to 20 years of experience in fund management and equity research. Mr Chirag Dagli is the dedicated fund manager for overseas investment since July 2019.

Graph 1: Growth of Rs 10,000 if invested in HDFC Mid-cap Opportunities Fund 5 years ago

Graph 1: Growth of Rs 10,000 if invested in HDFC Mid-cap Opportunities Fund 5 years ago

 Data as on November 19, 2019
(Source: ACE MF)

HMOF has performed reasonably well despite the sharp volatility witnessed in the mid cap segment over the last couple of years. Had you invested Rs 10,000 five years back on November 19, 2014 in HMOF it would now be worth Rs 16,022 (as calculated on November 19, 2019). This translates into a compounded annualised growth rate of 9.89%. In comparison, a simultaneous investment of Rs 10,000 in its benchmark Nifty Midcap 100 – TRI would have grown to Rs 14,614 (a CAGR of 7.88%). The fund has generated moderate lead over the benchmark in the last five years.

Graph 2: HDFC Mid-cap Opportunities Fund’s year-on-year performance

Graph 2: ABSLFEF year-on-year performance

 *YTD as on November 19, 2019
(Source: ACE MF)

Launched in June 2007, HMOF has a track record of over 12 years to its credit. Its year-on-year performance comparison relative to its benchmark Nifty Midcap 100 – TRI shows that the fund outpaced the index in 6 out of last 10 calendar years. Its outperformance in most years was in the range of 11 to 18 percentage points. The funds ability to restrict the downside risk has been impressive. In the on-going correction phase which began in January 2018, the fund has outdone the benchmark with a noticeable margin.

Table 1: HDFC Mid-cap Opportunities Fund’s performance vis-a-vis category peers

Scheme Name Corpus (Cr.) 1 Year (%) 2 Year (%) 3 Year (%) 5 Year (%) Std Dev Sharpe
Axis Midcap Fund 3,551 5.60 13.97 14.45 17.28 14.15 0.16
L&T Midcap Fund 5,831 -7.85 3.78 13.17 19.12 16.00 0.04
Sahara Midcap Fund 8 -3.76 2.66 12.68 14.77 16.29 0.03
Invesco India Midcap Fund 621 -0.92 8.15 12.62 17.72 15.84 0.07
Kotak Emerging Equity Fund 5,341 -3.22 4.72 12.00 19.74 15.79 0.03
DSP Midcap Fund 6,691 -2.76 4.38 11.96 17.55 15.63 0.03
Taurus Discovery (Midcap) Fund 51 -6.67 4.81 11.24 15.46 16.38 0.03
Nippon India Growth Fund 6,632 -2.16 5.26 11.10 14.09 15.62 0.02
HDFC Mid-Cap Opportunities Fund 22,637 -6.35 3.43 11.08 16.81 15.80 -0.01
ICICI Pru Midcap Fund 1,847 -5.43 4.23 10.88 15.87 15.23 0.01
Franklin India Prima Fund 7,510 -2.85 4.98 10.83 17.58 14.30 0.02
Tata Mid Cap Growth Fund 747 -0.17 5.57 10.65 16.81 17.46 0.05
Edelweiss Mid Cap Fund 945 -7.73 5.13 10.50 17.46 16.77 0.03
Sundaram Mid Cap Fund 5,883 -9.51 0.18 8.38 16.08 16.29 -0.05
BNP Paribas Mid Cap Fund 757 -6.07 1.69 8.15 15.33 16.60 0.00
Baroda Mid-cap Fund 47 -8.56 2.33 7.85 4.15 15.95 -0.03
Aditya Birla SL Midcap Fund 2,356 -9.82 -0.15 7.81 15.05 16.50 -0.06
Motilal Oswal Midcap 30 Fund 1,625 -3.44 1.58 7.00 15.06 16.88 -0.01
UTI Mid Cap Fund 3,745 -9.56 1.07 6.67 14.90 16.92 -0.04
Quant Mid Cap Fund 11 -3.85 5.52 6.49 8.81 13.50 0.01
Nifty Midcap 100 – TRI -10.11 0.42 8.68 13.52 18.66 -0.03

Returns are on a rolling basis and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on November 19, 2019
(Source: ACE MF)

Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

HMOF performed better than the benchmark across rolling periods. However, it lagged the category average in each of the rolling period, though with a lower margin.

The fund stood behind the top performers in the mid cap category such as Axis Midcap FundL&T Midcap FundSahara Midcap FundInvesco India Midcap Fund and so on but managed to stay ahead of many other peers.

In terms of risk-return profile, HMOF registered volatility nearly in line with the category average though lower as compared to the benchmark. While it managed to deliver better risk-adjusted returns as compared to the benchmark, the average category risk-adjusted returns were higher.

Investment strategy of HDFC Mid-Cap Opportunities Fund

HMOF predominantly invests in equities of mid cap companies with a minimum exposure of 65% of its assets. It also seeks to participate in other equity and equity related securities to achieve optimal portfolio construction. Given the higher volatility of mid caps, the fund lays strong emphasis on risk management.

The fund aims to build a portfolio of mid cap companies which have:

  • Reasonable growth prospects
  • Sound financial strength
  • Sustainable business models
  • Acceptable valuation that offers potential for capital appreciation

It aims to maintain a reasonably diversified portfolio at all times. The fund has the flexibility to invest a portion of its corpus in debt and money market instruments as well as units of REITs and InvITs.

Graph 3: Portfolio allocation and market capitalisation trend in HDFC Mid-cap Opportunities Fund

Graph 3: Portfolio allocation and market capitalisation trend in HDFC Mid-cap

 Holding (in %) as on October 31, 2019
(Source: ACE MF)

Categorised as a mid-cap fund, HMOF is mandated to hold at least 65% of its assets in equity and equity related instruments of mid cap companies. Accordingly, the fund allocates 65-70% of its assets in mid cap companies. In the last one year the fund has reduced its allocation to the highly volatile small caps from 27% to around 17% at present. Meanwhile, the allocation to the more stable large caps has been increased to 8% from 2-4% earlier. The fund’s cash and debt holding is usually in the range of 7-10%.

Graph 4: Top portfolio holdings in HDFC Mid-cap Opportunities Fund

Holding (in %) as on October 31, 2019
(Source: ACE MF)

HMOF held a diversified portfolio of 71 stocks as on October 31, 2019. The top 10 stocks constitute 31.6% of the portfolio with investment across sectors. Cholamandalam Investment & Finance Company has the top allocation of 4.4%, followed by Aarti Industries, Voltas, Balkrishna Industries, Sundaram Fasteners and City Union Bank with allocation in the range of 3-4% each. Rest of the stocks in the top 10 holdings have allocation in the range of 2-3%.

In terms of sector the fund has the highest exposure to Finance at 11.7% with another 9.3% in Banks. Auto Ancillaries, Consumer Durables and Engineering have the next highest allocation with exposure of around 10.5% each. Pharmaceuticals, Chemicals, Infotech and Consumption are the other prominent sectors in the portfolio.

Top contributors

Among the stocks in the portfolio, Trent Ltd. contributed the most to the fund’s gains in the last one year with a weighted return of 1.4%. Reliance Nippon Life Asset Management, Aarti Industries, Voltas, Whirlpool of India, City Union Bank and Cholamandalam Investment & Finance Company were the other major contributors to the portfolio gains. Most of these stocks are part of the fund’s top holdings.

On the other hand stocks like Arvind, RBL Bank, Glenmark Pharma, Balkrishna Industries, Indian Bank and Exide Industries eroded some of its gains.

Suitability of HDFC Mid-cap Opportunities Fund

HMOF holds a well-diversified midcap biased portfolio and has showcased sound performance over the years. While the fund’s volatility is within fair limits, the fund manager needs to focus on improving the risk-adjusted returns for its investors. Mid-caps have the potential to outshine large caps over long term, though the risk involved is higher. This makes HMOF suitable only for aggressive investors with high risk appetite and investment horizon of at least 5 years.

Note:  This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

This article first appeared on PersonalFN here.

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