In the current Indian stock market landscape, the Sensex has surged by an impressive 13 per cent in the past year, and is near record highs. Rather than attempting to time the market, prudent long-term investors are better served by gradually bolstering their equity holdings via goal aligned-Systematic Investment Plans (SIPs), blending stable large-cap investments with growth-focused mid-caps. Enter the HDFC Large and Midcap Fund, a four-star offering in our proprietary bl.portfolio Star Track Ratings. With a holding horizon of five years or more, this fund offers a promising recipe for potential returns. Having orchestrated a notable turnaround in the past three years, it shines as a performer with above-average return potential.

Strategy

HDFC Large and Midcap’s portfolio is a play on controlled exposure (minimum 35 per cent individual exposure to large- and mid-cap stocks) to top 250 companies. The fund is dynamic in terms of taking valuation calls and adjusts the portfolio accordingly. The scheme is benchmark aware and does not take any major sectoral calls. The underlying motive is to capture opportunities across value and turnaround companies. There is a mix of both bottom-up and top-down strategy for theme and stock selection.

Before SEBI came up with regulations on categorisation and rationalisation of mutual fund schemes, HDFC Large and Midcap Fund was known as HDFC Large Cap Fund (launched in 1994). Like many peers, this fund used to be large-cap focussed, with over 80 per cent allocation in 2017. From May-2018 onwards, it started lapping up mid-caps in-line with its new mandate. The fund’s name changed from HDFC Growth Opportunities to HDFC Large and Midcap Fund in June-2021.

Currently in terms of net assets, the fund holds 47.8 per cent in large-caps, 38.3 per cent in mid-caps, and 10.8 per cent in small-caps. In contrast to some funds, over the last one year the fund has benefitted from hiking allocation to small-caps, maintained exposure to mid-caps while trimming exposure to large-caps.

Performance

Despite a major portfolio reshuffle in line with new mandate from 2018, HDFC Large and Midcap Fund managed to outperform most peers and ended that year as the 4th best in the newly-formed category. But as markets marked an upswing in 2019, its performance lagged category and benchmark. 2020 saw similar performance. Gopal Agrawal was roped in that year (Jul. 2020) to steady the ship, and ever since, HDFC Large and Midcap Fund was scripted a turnaround. On the back of improved performance, the fund was back in the top-4 club of the category in both 2021 and 2022. Year to date in 2023, its the best performer. Consequently, the fund is in the top quartile for 3 years in a row (2021, 2022 and 2023 YTD).

On a point-to-point return basis, the fund has outdone its category average returns across one-, three- and five-year periods and as also benchmark Nifty Large Midcap 250 Total Return Index (TRI). Alpha (over benchmark) is 150-500 basis points in these periods. This is an acknowledgment of the consistency and competitive results achieved by fund manager. While delivering above category-average results, the manager appears to have been prudent as displayed by the HDFC Large and Midcap Fund’s top quartile ranking in risk-adjusted returns front (Sharpe Ratio: 1.5). Do note over the long term such as 10- and 15-year periods, the fund features among the laggards, but most these returns fall come from a time when the fund wasn’t a large- and mid-cap offering.

As a choice for SIPs, HDFC Large and Midcap Fund has delivered robust performance in the last 1-, 3- and 5-year period, comprehensively beating gains notched up by category-average and benchmark.

In the last three years, which fall under the fund’s new mandate, HDFC Large and Midcap Fund has built on the upswings. It boasts of a three-year upside capture ratio of 107, much higher compared to category average. During downmoves, the scheme has not struck any compromise as evident from its downside capture ratio (DCR) of 98.

Portfolio

The fund invests in a diversified portfolio of large and mid-sized companies with better growth potential. There is a strong emphasis on risk management to mitigate the inherently greater volatility of a portfolio dominated by mid-caps (67) and small-caps (42). As a result, the fund has over 150 stocks vs. its category-average of 66. This is also evident in the higher number of sectors (43) versus 28 for the large and midcap fund category.

The fund’s top sectoral bets are Financial services, Capital goods (underweight vs. category), Information technology (overweight), Healthcare and Automobile & auto components. Top stocks are HDFC Bank, ICICI Bank, Infosys, SBI, RIL, MphasiS, L&T, Gland Pharma, TCS and ITC. The fund has recently hiked exposure to HDFC Bank, Cholamandalam Investment, HPCL, TCS, Prestige Estates and Mphasis, while paring allocations to Trent and The Supreme Industries. Coforge, Sula Vineyards and Suzlon Energy are new bets.

With a portfolio valuation of 34.7 times price to earnings and 5.4 times price to book (according to ACE MF data), HDFC Large and Midcap Fund appears tilted towards value given the large and midcap fund category average of 41 times P/E and 6.7 times P/B.

Although the fund exhibits a slightly more aggressive investment style, as indicated by its higher exposure to small-caps, its execution has been decent in recent times. The fund demonstrates a fair degree of risk management by maintaining lower concentrations in its top 5 and 10 stocks compared with the average for its category. Do note the fund’s expense ratio is reasonably cheaper relative to the category.

Why buy
Performance turnaround
Higher returns than category, benchmark
Blend of growth and value
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