HDFC Midcap Opportunities Fund Review

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HDFC Mid-cap Opportunities

HDFC Mid-cap Opportunities is a mid-cap blend fund that was started in June 2007. The fund currently has assets under management (AUM) of Rs. 2,507.09 crore, which makes it the 13th-largest fund in the diversified-equity category.

Fund performance

	Scheme		YTD		6-month		1-year		3-year		5-year		Since inception
HDFC Mid-Cap Opportunities Fund(G)		-0.28		13.82		23.91		15.20		10.13		11.68
CNX Midcap		-1.66		16.67		17.79		5.10		2.73		--

All figures are in %; as on January 31, 2013

Year-to-date the fund is ahead of its benchmark. It lags behind over the six-month horizon but is ahead over the one-, three- and five-year horizons, which is a creditable performance. Since inception it has given its investors a decent return of 11.68 per cent compounded annually.

Next, let us turn to the fund's calendar-year performance to see if it has been consistent.

	Scheme		2012		2011		2010		2009		2008
HDFC Mid-Cap Opportunities Fund(G)*		39.98		-18.69		32.13		91.04		-51.74
CNX Midcap*		39.53		-31.47		19.16		94.85		-60.23
Out/under performance**		0.45		12.78		12.96		-3.81		8.50

*in %; **in %age pts.

In the five full calendar years for which the fund has existed, it has beaten its benchmark in four years, and that too by a handsome margin. Only in 2012 has the margin of outperformance got pared.

The one year when the fund failed to beat its benchmark was 2009, when the markets rose very steeply. That year the CNX Midcap Index rose 94.85 per cent. The fund trailed behind by 3.81 percentage points. Thus, with a return of 91.04 per cent, even that year the fund's performance was creditable in absolute terms.

Furthermore, the fund has provided sound downside protection to its investors. In both 2011 and 2008, when the markets declined, the fund managed to stem its decline to a much lower level than its benchmark.

Portfolio characteristics

Number of equity holdings. The fund currently holds 71 stocks in its portfolio, which is much higher than the median number of equity holdings for diversified-equity funds, which is 42.

Over the last one year (ending January 2013) the average number of stocks in its portfolio has been 65. Since its inception, the average number of stocks it has held is 54.42. Thus, the fund's portfolio tends to be more diversified rather than concentrated.

Sector concentration.

			Top 3		Top 5		Top 10
HDFC Mid-Cap Opportunities Fund(G)		32.83		44.53		62.25
Median-diversified equity		34.47		47.5		68.49

All figures are in %

The fund's exposure to its top three, five and 10 sectors is lower than that of the median for the diversified-equity category.

Company concentration.

			Top 3		Top 5		Top 10
HDFC Mid-Cap Opportunities Fund(G)		10.81		15.77		27.39
Median-diversified equity		18.41		28.03		45.52

All figures are in %

The fund's exposure to the top three, five and 10 stocks in its portfolio is lower than the median for the diversified-equity category.

Thus, based on our examination of three parameters—number of stocks in the portfolio, sector concentration and company concentration—one can conclude that the fund has a diversified portfolio currently.

Turnover ratio. According to the January 2013 figure, the fund had a turnover ratio of just 10.72 per cent. This is much lower than the median for the diversified-equity category, which stands at 68.50 per cent (category average 90.13 per cent).

The fund has always had a low turnover ratio. Its average level of turnover since inception has been 25.01 per cent, which is quite low by industry standards.

The fund's ability to generate sound returns while having a low turnover ratio is one of its positive characteristics.

Expense ratio. The fund has an expense ratio of 2.50 per cent, which is almost at par with the average of 2.53 per cent (median is also the same) for the diversified-equity category.

Risk.

	Scheme		SD		Beta
HDFC Mid-Cap Opportunities Fund(G)		0.8480		0.6190
Median-diversified equity category		0.9481		0.7967

Measures such as beta and standard deviation (calculated over three years ended January 31, 2013) demonstrate that the fund's level of risk is lower than the median for the diversified-equity category.

Risk-adjusted returns.

	Scheme		Treynor		Sharpe
HDFC Mid-Cap Opportunities Fund(G)		0.0745		0.0544
Median-diversified equity category		0.0282		0.0239

On measures of risk-adjusted return such as Sharpe ratio and Treynor ratio (also calculated over three years), the fund fares much better than the median for the diversified-equity category.

Cash calls. Currently the fund has a cash holding of 4.16 per cent. Over the last one year ending January 2013, it has had an average cash level of 5.22 per cent. A cash level of up to 5 per cent is considered optimal, so the fund's cash allocation has not been too high in recent times.

That the fund does not take big cash calls is a positive. Funds that move into cash in a big way during market downturns risk missing out on a sudden upturn in the market.

Portfolio strategy: Last one year ending January 2013

Year-to-date (up to January 31, 2013) the BSE Mid-Cap Index is down -1.66 per cent while the fund has declined much less at -0.28 per cent. Over the last one year ended January 2013, the fund has outperformed its benchmark: it rose 23.91 per cent whereas the benchmark rose 17.79 per cent.

Over the last one year the fund's exposure to large-cap stocks has averaged 46.76 per cent. Its exposure to mid-cap stocks has averaged 26.99 per cent and to small caps it has averaged 18.62 per cent. The fund has also had a small (average) exposure of 5.23 per cent to the 'others' category.

	Benchmark		Return-1 yr. (%)*
BSE FMCG		45.34
BSE Realty		31.06
BSE Consumer Durables		28.36
BSE BANKEX		28.00
BSE Health Care		26.53
BSE AUTO		18.96
BSE IT		10.66
BSE OIL & GAS		10.10
BSE TECk		9.25
BSE Capital Goods		6.40
BSE PSU		4.15
BSE Power		-6.00
BSE METAL		-7.76
BSE SENSEX		15.71
BSE MIDCAP		18.72
BSE SMALLCAP		9.45

*Returns are for 1-yr ended Jan 31, 2013

Over the last one year (ended January 2013) the sectors that have outperformed are a mix of defensives and rate-sensitives. Among defensives the best performers are FMCG, Consumer Durables and Healthcare. Among rate sensitives the best performers are Realty, Bankex and Auto.

	Sector		February 2012 (%)		January 2013 (%)		Raised/lowered allocation (%age pts.)
IT - Software		3.67		8.06		4.39
Bank – Private		4.04		6.57		2.53
Household & Personal Products		0.88		2.57		1.69
Chemicals		2.58		4.16		1.58
Plastic Products		2.91		4.24		1.33
Consumer Durables - Domestic Appliances		2.17		2.93		0.76
Pharmaceuticals & Drugs		13.42		14.07		0.65
Auto Ancillary		5.78		5.13		-0.65
Abrasives		6.29		3.82		-2.47
Bank – Public		13.88		10.7		-3.18

Over the last one year, the fund has raised its allocation to IT software, private banks, household and personal products, chemicals, plastic products and so on. Among its top 10 sector holdings, the fund reduced its allocation to public banks, abrasives and auto ancillary.

	Sector		Fund (%)		CNX Midcap (%)		Over/under weight vis-à-vis index (%age pts.)
Chemicals		4.16				4.16
Abrasives		3.82				3.82
Auto Ancillary		5.13		1.74		3.39
Plastic Products		4.24		0.94		3.3
Pharmaceuticals & Drugs		14.07		11.05		3.02
Consumer Durables - Domestic Appliances		2.93				2.93
IT - Software		8.06		5.26		2.8
Bank – Public		10.7		8.71		1.99
Bank – Private		6.57		5.42		1.15
Household & Personal Products		2.57		5.86		-3.29

Figures are for January 2013 (%age pts.)

By the end of January 2013, the fund was overweight vis-à-vis its benchmark on auto ancillary, plastic products, pharma and so on (see table above). Among its top 10 sector holdings, the fund was underweight vis-à-vis its benchmark on household and personal products.

	Company		February 2012 (%)		January 2013 (%)		Raised/lowered allocation (%age pts.)
Axis Bank Ltd.		0.15		2.57		2.42
Supreme Industries Ltd.		2.19		3.9		1.71
Amara Raja Batteries Ltd.		1.94		2.42		0.48
Union Bank Of India		1.96		2.36		0.40
Ipca Laboratories Ltd.		4.06		4.34		0.28
NIIT Technologies Ltd.		1.98		2.26		0.28
Solar Industries (India) Ltd.		2.58		2.27		-0.31
Bank Of Baroda		3.24		2.4		-0.84
Allahabad Bank		3.8		2.33		-1.47
Carborundum Universal Ltd.		4.49		2.54		-1.95

Over the last one year ended January 2013, the fund raised its allocation to stocks like Axis Bank, Supreme Industries, Amara Raja Batteries, Union Bank of India and so on. It lowered its allocation to stocks like Carborundum Universal, Allahabad Bank, Bank of Baroda and Solar Industries India.

	Company		Fund (%)		CNX Midcap (%)		Over/under weight vis-à-vis benchmark (%age pts.)
Ipca Laboratories Ltd.		4.34				4.34
Supreme Industries Ltd.		3.9				3.9
Axis Bank Ltd.		2.57				2.57
Carborundum Universal Ltd.		2.54				2.54
Amara Raja Batteries Ltd.		2.42				2.42
Bank Of Baroda		2.4				2.4
Solar Industries (India) Ltd.		2.27				2.27
NIIT Technologies Ltd.		2.26				2.26
Allahabad Bank		2.33		0.98		1.35
Union Bank Of India		2.36		1.72		0.64

Figures are for January 2013

When one compares the fund's allocation to stocks vis-a-vis that of its benchmark, we find that it is overweight Allahabad Bank and Union Bank of India. What is notable is that eight of the fund's top 10 holdings are from outside the benchmark, which indicates that the fund manager forays far and wide in his search for attractive picks, instead of confining himself to index stocks.

Fund manager

Chirag Setalvad has been managing this fund since April 2007. He is widely regarded as one of the top fund managers in the mid- and small-cap space owing to the track record that he has created with this fund.

Some of the other funds that he manages include HDFC Balanced, HDFC Capital Builder, HDFC Children's Gift-Investment & Saving Plans, HDFC Long-Term Advantage, and HDFC Multiple Yield 2005. All the funds managed by him have a sound track record, which is a remarkable achievement.

Why do we like this fund? There are many good reasons: sound long-term returns, ability to provide sound downside protection, low turnover ratio, avoidance of high cash calls, below-median level of risk and above-median level of risk-adjusted returns.

If you are looking for a fund for the mid- and small-cap portion of your portfolio, you should certainly consider HDFC Mid-cap Opportunities.

Happy Investing!!

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