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Mutual Fund Review: HDFC Mid-Cap Opportunities

HDFC Mid-Cap Opportunities' increased allocation to value stocks in 2010 helped it check volatility in returns…

Strategy


The fund aims to generate appreciation by investing predominantly in mid-cap stocks. The risk of holding such stocks is reduced by maintaining a well diversified portfolio. While the portfolio will primarily focus on a buy-and-hold strategy at most times, it will balance the same with a rational approach to selling when the valuations become too demanding even in the face of reasonable growth prospects in the long run. The key will be to identify stocks with room for PE multiples to expand if the company transitions from a small to mid and eventually a large-cap stock. The fund may also seek investment opportunity in the ADR / GDR / foreign equity and debt securities up to a maximum 25 per cent of net assets.

 

Our View


This fund is mandated to invest at least 70 per cent in mid-cap stocks and 5 per cent in small-cap stocks to generate capital appreciation. It may also take derivatives positions based on the opportunities available.


Launched in June 2007, it made its mark the very next year by simply not collapsing like a pack of cards. It contained the 2008 downside a lot better than its peers because of its then closed-end status. That year the fund also managed to outperform its benchmark, the CNX Midcap. And, with no redemption pressure, the fund retained over 92 per cent equity allocation throughout 2008, before the market started to turn around in 2009. In 2010, the fund turned open ended.


If one looks at the long-term return as well as the annual returns of 2009 and 2010, this fund has emerged a winner.

 

The Verdict


The fund increased its exposure to value stocks in 2010. That helped it turn in a good performance last year and also checked volatility in its returns.

 

Portfolio Insight


• Banking, Capital Goods, Pharmaceuticals and Auto & Auto ancillaries are the top sectors.
• The fund was heavy on Consumer Goods up to April 2009 but steadily reduced exposure, a strategy contrary to peers. The profits from the sector, though, were handsome.
• The portfolio comprises around 50 stocks.
• On an average 60 per cent of the portfolio is in mid caps and 30 per cent in small caps.
• Stock selection is key to this fund's success. Vesuvius India is a case in point. It is a niche player in molten metal, glass and renewable energy. Other picks that have aided growth are NRB Bearings and Grindwell Norton.

 

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