Management
The portfolio managers, Jitendra Sriram and Nilang Mehta, are co-managers of HSBC Equity. Sriram has overall 14 years of capital markets experience and manages this fund since May 2006. Mehta has overall eight years of investment management experience and has been managing this fund since the last three months. Mihir Vohra, who was earlier managing this fund, left the fund house in December 2008.
The fund is supported by seven analysts-four in the mutual fund division and the rest three in the portfolio management services division. The mutual fund house shares research generated by the mutual fund and PMS divisions for investment decisions.
Each analyst has average four years of stock research experience and covers two-three sectors each, covering 200 stocks actively. The fund management team also tracks another 150 stocks on a passive basis.
Strategy
This fund invests 85% of its corpus in large-cap stocks and the rest in mid-cap stocks in line with its benchmark, the BSE 200 Index. It invests across market spectrum and strives to achieve long-term capital growth. The fund follows top-down investment approach for sector orientation and bottom-up approach for stocks selection. The fund seeks to invest in stocks, which can offer growth at reasonable price. During market downturn, the fund is likely to maintain cash exposure to the extent of 20% of its corpus.
Sriram admitted that the fund’s higher cash exposure as of February 2009 had impacted its performance between March-May 2009 when markets surged around 70%. We believe it is difficult to catch such sharp rallies and match the main indices in short-term, however, higher cash allocation could prove to be detrimental to fund’s long-term performance as study shows sharp rallies in equities has come over a short period of time.
This fund differentiates itself from the competition as a pure large-cap fund to the extent of 85% of portfolio size and would not invest in mid-caps more than 15% of its corpus at all times.
The portfolio management team has price targets for each security in place and would evaluate the future outlook of the security once the price target is breached.
The portfolio's risk is controlled through position size and the fund uses MSCI Barra to identify potential risks and portfolio allocation vis-a-vis benchmark.
We think the portfolio manager, Jitendra Sriram, has sound understanding of fund’s investment strategy, portfolio allocation process and has conviction in his picks. The portfolio manager is benchmark conscious and picks growth-oriented stocks from the benchmark sectors.
Performance
During the five-year period ended April 2009, the fund outperformed approx 80% of its peers and registered 18.2% return. In comparison, the large-cap category posted 14.8% return. The fund also showed strong performance during the last three-year period and was rated five stars by Morningstar. In terms of return, the fund bagged the "Above average" rating during the five-year period.
On the risk front, the fund performed well too. Its risk during the five-year period was lower than the category average and therefore, was assigned “Below average” risk rating. During the five-year period, the fund was rated with four stars by Morningstar.
The fund manager increased the fund’s exposure to the energy sector in early 2007 and gradually doubled as of April 2009, owing to increasing profit margins and oil exploration and production (upstream) segment gaining traction. As the energy sector accounted for the second largest position in the fund’s portfolio, a decline in crude oil price is likely to have a larger impact on the fund’s return.
The fund manager favored the consumer staples sector in late 2007 and significantly increased exposure in 2008, owing to its defensive investment approach. The fund’s return, however, was impacted recently, owing to overweight exposure, relative to the benchmark, to this sector. This sector accounted for the largest holding in the fund’s portfolio as of April 2009.
The manager cut the fund’s exposure to the materials sector in early 2008, owing to a decline in global commodity prices, led by a slowing economic growth. Exposure to the industrials sector was reduced in early 2008, owing to capex issues, driven by the financial markets turmoil and slowdown in domestic economic growth.
Costs
This fund’s 2.0% annual expense ratio hovers around the median compared with similar large-cap funds.
Conclusion
This fund is one of the best choices within the large-cap category. However, we think the current portfolio management team is approx three-year old (Sriram since May 2006 and Mehta just few months old on this fund) and therefore, we would like to see this team’s performance over five year period.
