HSBC Mutual Fund launches HSBC Focused Equity Fund (HFEF) an open-ended equity scheme that will invest in only 30 stocks across market cap.

As per SEBI regulations, a focused fund is not allowed to hold more than 30 stocks and invest a minimum of 65% of its assets in equity and equity-related instruments, which exactly what HFEF is following. However, it will also allocate some portion (up to 35% of its total assets) to debt and money market instruments from an asset allocation standpoint and to mitigate the risk.

Considering the recent corrections in the market caused due to the virus and sluggish economy, there is ample opportunity to do value buying. And if done with a focused approach, it will surely reward investors in the long run.

HSBC Mutual Ffund is of the view that a focused strategy can help accelerate wealth creation and launched HFEF. This fund is worthwhile because it aims to build a concentrated portfolio of 30 stocks that have high conviction ideas of potential high performance across market capitalisation and are sector agnostic.

Illustration 1: Conviction & Concentration builds Focused strategy

(Source: HSBC Focused Equity Fund Product Note)

On the risk-return matrix, HFEF owing to its focussed approach while investing in equities would be a very high-risk, very high-return investment proposition, although the fund holds the flexibility to invest across market capitalisation segments and is sector agonistic.

[Read: Why Comparing Returns to Risk Is More Meaningful!]

So, HFEF is suitable for investors with a stomach for very high risk and an investment time horizon of at least 7-8 years while seeking capital appreciation.

Table 1: Details of HSBC Focused Equity Fund

Type An open ended equity scheme investing in maximum 30 stocks across market caps (i.e. Multi-Cap) Category Focused Fund
Investment Objective To seek long term capital growth through investments in a concentrated portfolio of equity & equity related instruments of up to 30 companies across market capitalization. However, there is no assurance that the investment objective of the Scheme will be achieved.
Min. Investment Rs 5,000 and in multiples of Re 1 thereafter Face Value Rs 10 per unit
Plans
  • Regular
  • Direct
Options
  • Growth*
  • Dividend
    • Re-investment Facility*
    • Pay-out Facility
  • *Default option
Entry Load Nil Exit Load
  1. Any redemption / switch-out of units within 1 year from the date of allotment shall be subject to 1% exit load
  2. No Exit Load will be charged, if units are redeemed / switched-out after 1 year from the date of allotment.
Fund Manager Mr Neelotpal Sahai and Mr Gautam Bhupal Benchmark Index S&P BSE 200 TRI
Issue Opens July 1, 2020 Issue Closes: July 15, 2020

(Source: Scheme Information Document)

How will the scheme allocate its assets?

Under normal circumstances, the scheme’s asset allocation will be as under:

Table 2: HFEF’s Asset Allocation

Instruments Indicative Allocations (% of total assets) Risk Profile(High/ Medium/ Low)
Minimum Maximum
Equities & Equity related securities* 65% 100% High
Debt instruments & Money Market instruments (including
Cash & Cash equivalents)
0 35% Low to Medium
Units issued by REITs and InvITs 0 10% Medium to High

* Subject to overall limit of 30 stocks across market capitalization. If the Scheme decides to invest in securitised debt, it is the intention of the Investment Manager that such investments will not normally exceed 20% of the corpus of the Scheme. The Scheme shall have derivative exposure as per the SEBI regulations issued from time to time. However, the Scheme does not intend to write call options under covered call strategy. Further, derivatives exposure shall not exceed 50% of the net assets of the scheme. The cumulative gross exposure through equity, debt & money market instruments, REITs & InvITs units and derivative positions, shall not exceed 100% of net assets of the Scheme.
The Scheme does not intend to invest in structured obligations and foreign securities. The Scheme shall not engage in short selling or securities lending.

(Source: Scheme Information Document)

What will be the Investment Strategy?

The aim of HSBC Focused Equity Fund is to seek growth and deliver above-benchmark returns by providing long-term capital growth from an actively managed portfolio comprising of up to 30 companies across market capitalization.

The scheme aims to invest predominantly in equity and equity related securities. Currently, the large cap companies are the 1st-100th, mid cap companies are 101st – 250th, and small cap companies are 251st company onwards in terms of full market capitalization.

The list of stocks would be as per the list published by AMFI in accordance with the SEBI circular no. SEBI/HO/IM/DF3/CIR/P/2017/114 dated October 6, 2017 and may be amended by SEBI from time to time and updated on half-yearly basis.

HFEF will endeavor to achieve this by maintaining a minimum of 65% allocation to equity and equity related securities. In addition, investments could be towards fixed income securities, including money market instruments.

HFEF will employ a top down and bottom up approach to invest in equity and equity related instruments. Decision for investments will be based on the fund managers with their teams analysis of business cycles, regulatory reforms, competitive advantage, etc.

When it comes to selecting stocks, the fund managers will focus on the fundamentals of the business including profitability, the industry structure, the quality of management, sensitivity to economic factors, the financial strength of the company, valuation and the key earnings drivers. TheThe scheme will maintain a portfolio spread across various industries / sectors in order to mitigate the concentration risk.

As per the asset allocation pattern indicated above, for investment in debt securities and money market instruments, the Scheme may invest a part of its portfolio in various debt securities issued by corporates and/or state and central government. These government securities may include securities supported by the ability to borrow from the treasury, or supported only by the sovereign guarantee of the state government or supported by GOI / state government in some other way.

With the aim of controlling risks, rigorous in depth credit evaluation of the instruments proposed to be invested in will be carried out by the Investment Team of the AMC. Risk will also be reduced through adequate diversification of the portfolio.

Who will manage the HSBC Focused Equity Fund?

Mr Neelotpal Sahai and Mr Gautam Bhupal are the Fund Managers of the Scheme.

Mr Neelotpal Sahai is the Senior Vice President & Fund Manager of Equities at HSBC Asset Management (India) Private Limited. He is associated with HSBC Asset Management from April 2013.

He holds a B. Tech degree from IIT Varanasi and PGDM from IIM Kolkata. He has work experience of over 24 years in Research and Fund management. He worked as an Equity Analyst for 2 years with UTI Securities Ltd, then joined SBC Warburg as an Analyst for a period of one year. Further, he joined Vickers Ballas Securities Ltd for a year as an Analyst to later join Infosys Ltd as a Senior Project Manager for 6 years. Thereafter, Sahai joined Motilal Oswal Securities Ltd as a Senior Research Analyst for a year, followed by an opportunity to work as a Director in IDFC Asset Management Company Ltd for 7 years before joining HSBC Asset Management.

Some of the schemes he manages and co-manages at the Fund house include HSBC Large Cap Equity FundHSBC Multi Cap Equity Fund, and HSBC Equity Hybrid Fund.

Table 3a: Performance of schemes managed by Mr Neelotpal Sahai

Scheme name Managing since Benchmark name Scheme Returns (%) Benchmark returns(%)
HSBC Large Cap Equity Fund May-13 NIFTY 50 – TRI 9.39 9.30
HSBC Multi Cap Equity Fund NIFTY 500 – TRI 10.74 10.01
 HSBC Equity Hybrid Fund Oct-18 Crisil Composite Bond Fund Index 2.67 13.62

Data as on July 1, 2020
(Source: ACE: MF; PersonalFN Research)

From the performance table it is seen that two schemes are almost in line with the benchmark returns.

Mr Gautam Bhupal has done his post-graduate diploma in Business management after he completed his honorary commerce graduation followed by BA and CS.

Mr Bhupal is the Vice President & Fund Manager of Equities at the HSBC Asset Management (India) Private Limited. He is associated with HSBC Asset Management from July 2008. Before joining HSBC as a Fund manager for PMS Portfolios, he worked as an Equity Research Analyst for 4 years at UTI Asset Management Company.

Some of the schemes he manages and co-manages at the Fund house include HSBC Infrastructure Equity FundHSBC Tax Saver Equity FundHSBC Regular Savings FundHSBC Managed Solutions India-GrowthHSBC Managed Solutions India-Moderate, and HSBC Managed Solutions India-Conservative.

Table 3b: Performance of schemes managed by Mr Gautam Bhupal

Scheme name Managing since Benchmark name Scheme Returns (%) Benchmark returns(%)
HSBC Managed Solutions India–Conservative Oct-15 Crisil Composite Bond Fund Index 5.59 9.17
HSBC Managed Solutions India–Growth 5.59 9.17
HSBC Managed Solutions India–Moderate 5.78 8.13
HSBC Infrastructure Equity Fund May-18 S&P BSE India Infrastructure Index -25.67 -20.66
HSBC Regular Savings Fund Jul-19 CRISIL Hybrid 85+15 – Conservative Index 4.53 9.10
HSBC Tax Saver Equity Fund Jul-19 S&P BSE 200 – TRI -7.60 -5.12

Data as on July 1, 2020
(Source: ACE: MF; PersonalFN Research)

The schemes managed by Mr Gautam Bhupal have not performed well as compared to the respective indices. This doesnt give much confidence to the investors.

The outlook for HSBC Focused Equity Fund:

On evaluating HFEF’s investment objective and strategy, it is evident that the fortunes of the fund will be closely linked to a maximum of 30 stocks held in the portfolio.

HFEF will structure the portfolio using a DSR portfolio framework as the investment strategy: Dominant players + Sustainable profitability+ Reasonable valuations

Illustration 2 : Investment strategy

(Source: HSBC Focused Equity Fund Product Note)

While diversification across market capitalisation segments and stock selection with a bottom-up approach remain the fundamental strategy, how the fund managers ultimately constructs the portfolio remains to be seen.

Current times of volatility does offer value buying opportunities in the small-cap and mid-cap segments due to market corrections. Even the large-cap segment witnessed a downfall, but it comprises of large blue-chip companies with strong balance sheets and proven track records.

So, while constructing the portfolio with the aim of diversification, a dominant allocation to large-cap can offer stability to the investment portfolio of the HSBC Focused Equity Fund and could help ride the wave of short-term volatility to a certain extent.

Recent pandemic lockdown has amplified the pressure and dampened corporate earnings. Hence, the impact of corporate earnings on your mutual fund portfolio hinges on the portfolio characteristics of the schemes you hold in your portfolio. So the fortune of the fund will be closely linked to a maximum of 30 stocks held in the portfolio (multi cap) that are managed by fund managers; how they deal with risk factors to achieve the stated objective is crucial.

This article first appeared on PersonalFN here


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