HDFC Top 100 Fund: Gaining Back its Glory

Welcome to PersonalFN's weekly analysis on diversified equity mutual funds. In this issue, we have analysed HDFC Top 100 Fund, highlighting its performance, peer comparison, investment strategy, fundamentals, portfolio, and suitability.

HDFC Top 100 Fund is a high conviction-driven Large Cap Mutual Fund that has emerged from a long bout of underperformance to gain back its past glory and reward investors for their patience.

Past performance is not an indicator of future returns
April 24, 2023
(Source: ACE MF)

Though HDFC Top 100 Fund's long-term track record is encouraging, its prolonged underperformance in 2015 and then in 2019-20 was a concern for many investors, who thought the fund might not regain its former glory. Notably, some of fund manager's high-conviction ideas took a long time to deliver the desired results, causing a sharp underperformance compared to the benchmark and many of its peers. However, HDFC Top 100 Fund registered a turnaround growth in the last couple of years. In the last 2-year and 3-year periods, HDFC Top 100 Fund outpaced the benchmark and the category average by a CAGR of around 3-5 percentage points. The superior performance in recent years has significantly improved its long-term returns as well. The fund now stands among the top quartile performers in the category across time frames and has also generated decent alpha over the benchmark.

While HDFC Top 100 Fund carries a higher Standard Deviation signifying excess volatility compared to its category peers, it is nearly in line with the benchmark. In terms of risk-adjusted return, as denoted by the Sharpe ratio, HDFC Top 100 Fund has outpaced most of its peers as well as the benchmark.

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Investment strategy of HDFC Top 100 Fund

Being a Large Cap fund, HDFC Top 100 Fund maintains a minimum exposure of 80% in large-cap stocks (top 100 companies by market capitalisation). The fund has the flexibility to invest across sectors and economic variables. HDFC Top 100 Fund follows a blend of growth and value investment to deliver optimal returns at a reasonable risk level.

While creating the portfolio, the fund manager adopts the bottom-up approach to pick stocks and blends it with the top-down approach to analyse macro trends. The stock selection involves a 3-pronged framework that analyses each stock on key parameters such as the strength of the business model, quality and experience of the management team, and financial metrics (RoE, RoCE, cash flows, balance sheet, etc.).

The fund has high conviction in most of its stocks and holds them with a long-term view. Accordingly, HDFC Top 100 Fund's portfolio turnover ratio is usually around 15%.

HDFC Top 100 Fund usually holds a well-diversified portfolio of about 50 to 60 stocks. As of March 31, 2023, the fund held 50 stocks in its portfolio, with a higher concentration on selected index heavyweights. While the top 5 holdings accounted for about 36% of the portfolio, the top 10 stocks comprised 67% of its assets. Among its top holdings, the fund held higher exposure to ICICI Bank, HDFC Bank, Reliance Industries, Infosys, and ITC. Many of the stocks in its top holding have been part of the fund's portfolio for multi-years now.

HDFC Top 100 Fund's high conviction on its prominent bets like ICICI Bank, ITC, SBI, L&T, NTPC, and Coal India turned out to be highly rewarding in the last couple of years. The fund also benefitted from its holdings in stocks like Bharti Airtel, Sun Pharma, Bharat Electronics, Tata Motors, Axis Bank, Siemens, Reliance Industries, HDFC Bank, and Power Finance Corporation, among others. Meanwhile, it booked profit in Power Grid Corporation, GAIL (India), CESC, tech Mahindra, Indian Oil Corporation, and ABB India, among others.

In terms of sectoral bets, HDFC Top 100 Fund's portfolio is overweight on the Banking & Finance sector, where it has currently allocated about 37% of its assets. The fund also held significant exposure in Infotech and Consumption, which form another 20% of its assets. Petroleum, Engineering, Pharma, Auto, Power, Telecom, and Mining are among the other prominent sectors in HDFC Top 100 Fund's portfolio. It's portfolio has a well-balanced allocation to cyclical, defensive, and sensitive sectors.

Suitability

After a prolonged underperformance, HDFC Top 100 Fund has shown a significant turnaround performance and has found a place among the top performers in the Large Cap Fund category. While the fund is not a great bear market performer, its return profile surely stands out during recovery and bull market phases, and it is capable of rewarding investors reasonably over complete market cycles.

Due to its high-conviction approach, HDFC Top 100 Fund may witness a near-term underperformance if its high-conviction bets move out of favour or when the market rallies are momentum-driven. However, the focus on creating a well-diversified portfolio of fundamentally sound stocks can help it generate decent gains for investors. Notably, the fund has a reliable track record of delivering reasonable risk-adjusted returns over longer time periods.

HDFC Top 100 Fund is suitable for investors looking for a high conviction-driven fund with a long-term time horizon of at least 5 years.

Related links:

Canara Robeco Small Cap Fund: Delivering Strong Growth through Diversification

Canara Robeco Bluechip Equity Fund: Showcasing Stable Long-term Performance

Quant Mid Cap Fund: Generating Alpha through Agile Portfolio Strategies

Parag Parikh Flexi Cap Fund: Protecting Downside Risk through Value-oriented Approach

HDFC Mid-Cap Opportunities Fund: Witnessing Turnaround Growth

Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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