A business cycle is a journey across four phases of growth in business activity, observed in acceleration/deceleration across factors such as volume growth, pricing power, competitive intensity, cost consciousness, capex intensity, ROCE (Return on Capital Employed) and business sentiment. Business cycles are widely understood in economics to cover the journey of periods of expansion and contraction in business and commercial activity. Each business cycle comprising of upcycle and downcycle typically has 4 phases:

  • Expansion – A sector or an economy is going through a cycle of high growth
  • Peak – The growth stabilises at a high level
  • Contraction – The growth in the sector or the economy starts declining/slow growth
  • Slump – Phase of weak/no growth

Each of these phases favours growth in different sectors and opens different cyclical opportunities, which call for a unique investing style – ‘Business cycle-based investing’. Such shifts in business cycles can provide room to identify investment opportunities across sectors/themes/market caps.

However, the domestic economy is showing indications of revival despite the current high market volatility, and investors are looking to invest in businesses with strong development prospects. Thus, the business cycle funds are a good option for investors to invest and benefit from the shifts in business cycles and generate superior risk-adjusted returns.

Major fund houses like ABSL Mutual FundKotak Mahindra Mutual Fund and ICICI Pru Mutual Fund have launched business cycle funds in the last two years. There are seven business cycle schemes in the market at the moment. Following the trend of these peers, HDFC Mutual Fund has rolled out HDFC Business Cycle Fund, it is an open-ended equity scheme following a business cycles-based investing theme.

Commenting on the launch of this fund, Mr Navneet Munot, MD and CEO at HDFC Asset Management Co. Ltd, said, “In an era marked by increasing complexities and shortening of business cycles, positioning portfolios well should be a rewarding activity. HDFC AMC aims to support investors to stay ahead by using a blend of a top-down and bottom-up approach, leveraging strengths in its research and fund management team. The launch of this NFO is a further step in the direction of being the wealth creator for every Indian.”

Table 1: Details of HDFC Business Cycle Fund

Type An open-ended equity scheme following business cycles-based investing theme. Category Thematic – Equity Fund
Investment Objective To provide long-term capital appreciation by investing predominantly in equity and equity-related securities with a focus on riding business cycles through dynamic allocation between various sectors and stocks at different stages of business cycles. There is no assurance that the investment objective of the Scheme will be realized
Min. Investment Rs 100/- and in multiples of Re 1 thereafter. Additional purchase Rs 100/- and in multiples of Re 1 thereafter. Face Value Rs 10/- per unit
SIP/SWP/STP Available
Plans
  • Direct
  • Regular
Options
  • Growth
  • Income Distribution cum Capital Withdrawal (IDCW)
Entry Load Not Applicable Exit Load
  • In respect of each purchase/switch-in of units, an Exit load of 1% is payable if units are redeemed/switched-out within 1 year from the date of allotment.
  • No Exit Load is payable if units are redeemed / switched-out after 1 year from the date of allotment.
Fund Manager – Mr Rahul Baijal Benchmark Index Nifty500 TRI (Total Returns Index)
Issue Opens: November 11, 2022 Issue Closes: November 25, 2022

(Source: Scheme Information Document

The investment strategy for HDFC Business Cycle Fund will be as follows:

HDFC Business Cycle Fund will aim to provide long-term capital appreciation by investing predominantly in equity and equity-related securities with a focus on riding business cycles through dynamic allocation between various sectors and stocks at different stages of business cycles.

While doing portfolio construction, the scheme would follow a blend of a top-down approach to identify stages of business cycles, sector opportunities, and a bottom-up approach to identify strong companies within those sectors. The stage and likely trajectory of business cycles will be assessed by the top-down macro trends observed in the sector/business/economy/macro indicators.

The fund manager will look at various business-specific indicators like the outlook on growth, competition in the marketplace, pricing power, bargaining power of buyers and suppliers, threat of substitutes in products, consumer sentiment, capacity utilisation, capex plans and also macro indicators like domestic economic growth, changes in government regulations, business confidence index, inflation trends, interest rates, geopolitical issues, global growth for exports potential, and other external factors.

The bottom-up stock selection investment framework shall follow a rigorous in-house process based on fundamental analysis and research. The fund manager will favour companies that are most attractively valued relative to their quality of management, business model & financial metrics. Thus, the scheme will aim to benefit from the improvement/acceleration in earnings as the business enters a phase of upcycle (expansion-peak) by identifying stocks which are best positioned to capture that business upcycle, keeping the valuations in perspective.

While sector allocation will largely consider the stages of the business cycles, the Scheme will aim at being reasonably diversified across various sectors/sub-sectors and across market capitalization (combination of large, mid & small caps). The scheme may also invest in hybrid securities, viz. units of REITs and InvITs for diversification and subject to necessary stipulations by SEBI from time to time. The scheme will retain the flexibility to invest in the entire range of debt instruments and money market instruments.

Under normal circumstances, the Asset Allocation will be as under:

Table 2: Asset Allocation for HDFC Business Cycle Fund

Instruments Indicative Allocation (% of net assets) Risk Profile
Minimum Maximum High/Medium/Low
Equity and Equity related instruments of Business cycle based theme companies 80 100 Very High
Equity and Equity related instruments of companies other than above 0 20 Very High
Units of REITs and InvITs 0 10 Medium to High
Debt securities*, money market instruments and Fixed Income Derivatives 0 20 Low to Medium
Units of Mutual Fund 0 20 Low to High

* including securitised debt, other structured obligations (SO), credit enhanced debt (CE), debt instruments with special features such as subordination to equity (absorbs losses before equity capital) and /or convertible to equity upon the trigger of a pre-specified event for loss absorption (also referred to as “perpetual debt instruments”)

(Source: Scheme Information Document

Who will manage HDFC Business Cycle Fund?

The designated fund manager for this scheme will be Mr Rahul Baijal. He has completed his PGDM (MBA) from IIM (Kolkata) and B.E from Delhi College of Engineering. He has overall 21 Years of experience in Fund Management and Equity Research. Prior to joining HDFC AMC, he was working with Sundaram Asset Management Company Limited as Senior Fund Manager РEquity and with Bharti Axa Life Insurance Company Limited as Vice President РInvestments (Fund Manager). At HDFC Mutual Fund, Mr Baijal currently manages HDFC Top 100 Fund.

Fund Outlook – HDFC Business Cycle Fund

HDFC Business Cycle Fund is a theme-based fund that will use a combination of indicators across the domestic and global economy to identify the current phase of the business cycle. The scheme endeavours to identify sectors and high-quality businesses within them. The scheme will dynamically rotate its portfolio across sectors that can benefit from the prevailing business cycle of the economy. A business cycle is defined in terms of periods of expansion and contraction.

The scheme endeavours to invest in businesses likely on the cusp/midst of a favourable business upcycle and avoid businesses about to enter/in a downcycle. When businesses are in upcycle, investors get the dual benefit of earnings growth and improvement in valuation multiples. Notably, business cycle transitions are generally gradual and have many overlapping periods. Thus, the fund may be reasonably diversified across various industries and/or sectors by investing in stocks that are best levered to the stage of the business cycle and transition period.

However, do note that changes in business cycles can be sharp and sometimes short-lived, so the fund manager should be able to navigate through short-term volatility while also staying focused on the overall business cycle view. Being a thematic fund, this scheme will focus on investing in opportunities arising out of various stages of business cycles. This could limit the fund’s capability with a concentrated exposure towards a few sectors, thus making it a risky proposition.

In addition, the persistent repercussions of the geopolitical tension, spiralling inflation and the fears of a possible recession in the US in 2023 may cause a significant risk to economic growth and continue the prevailing high market volatility. The margin of safety appears to be narrow, and the clear direction for the equity market from the current elevated levels is uncertain. These factors, among many others, may affect the scheme’s performance and face intensified volatility in the near term.

Thus, HDFC Business Cycle Fund is suitable only for investors looking for a fund that is agile in the rotation of investments based on an assessment of the stages of business cycles. Ensure you have a high-risk appetite and a long-term investment horizon of at least 5-7 years to survive the market volatility and that your investment objective is aligned with the fund.

This article first appeared on PersonalFN here


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