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With the Indian markets reaching uncharted territories, large-cap stocks i.e. shares of the top 100 companies by market capitalisation, today offer better valuation comfort than mid-caps and small-caps. In this scenario, large-cap funds are a prudent choice for those building a long-term portfolio or seeking to grow their portfolio with incremental investments. Large companies enjoy easy access to capital, offer established financial track record, relatively stronger balance sheets, deep management bandwidth, industry leadership and robust businesses. With large-cap stocks in India a fraction of their global counterparts, there is a decent return opportunity as GDP growth is likely to lead to an inflection point across various sectors. We recommend SIPs in HDFC Top 100 Fund, rated 3 stars by our proprietary Star Track MF Rating methodology, given its strong pedigree and performance turnaround in last three years, supported by a blend of growth at reasonable price and value approach.
Strategy
HDFC Top 100, called HDFC Top 200 till May 2018, was launched way back in October 1996 by Zurich MF (later acquired by HDFC MF). As per its mandate as a large-cap fund, the scheme has to maintain a minimum exposure of 80 per cent to large-cap stocks. This is the fifth-largest actively managed large-cap fund and till July 2022 offered a unique experience of the same manager (Prashant Jain) continuing for about two decades coinciding with multiple market cycles. Now, the baton has passed to Rahul Baijal, who in the ~18 months of being in-charge has managed it well. Unlike Jain who was a tad more value-conscious which led the the fund under-performing in phases, Baijal’s investment style is all about striking a blend of growth at reasonable price and value. While doing bottom up stock selection, the fund pays attention to company’s positioning and trends in business, sector and valuation cycles. The fund’s 3-pronged framework focusses on business model, management and financial metrics. Active positions are taken in a controlled manner. High conviction bets are evaluated on a risk-reward basis. Despite being a large-cap fund, the scheme is well-diversified in number of stocks and is measured on sector deviations versus benchmark (NIFTY 100 TRI).
Performance
After notching up forgettable performances in 2019 and 2020 (bottom quartiles), HDFC Top 100 has marked a turnaround in 2021 (upper mid quartile), 2022 and 2023 YTD (top quartiles) with better-than category average as well as benchmark returns. In the last 18 months, since Baijal has been at the helm, the fund has maintained its outperformance.
On a trailing return basis, HDFC Top 100 has clocked 22 per cent, 21.9 per cent and 15.8 per cent in 1-, 3- and 5-year periods comfortably beating large-cap category average and NIFTY 100 TRI. In terms of SIP returns (XIRR), the veteran fund has comprehensively beaten category average and the benchmark in both short-, medium- and long-term periods (see chart).
Rolling returns of the fund also indicate decent consistency. Not only is the fund’s mean rolling returns over a period, say last 10 years, is better than category and benchmark, its rolling return distribution (see chart) shows a good spread.
The fund does sport above-average volatility, an aspect which may wear off over time. Do note compared to its large peers such as ICICI Pru Bluechip, SBI Bluechip, Mirae Asset Large Cap and Axis Bluechip, HDFC Top 100, as per ACEMF data, is better placed in terms of risk ratios such as Jensen Alpha, Sharpe Ratio, Sortino Ratio, Upside Capture Ratio and Down Capture Ratio in the last 3-year period.
Portfolio
Over the years, HDFC Top 100 has shown a tendency invest in higher quality, competitive, sustainable businesses. It usually maintains a 50-55 stock portfolio. While its mandate is to maintain a minimum exposure of 80 per cent to large-cap stocks, the fund has regularly kept nearly 90 per cent allocation to large-caps. This is in contrast to many of its peers, who often ramp up mid-cap expsoure for returns.
Sectorally, HDFC Top 100’s current favours Banks (30 per cent), IT (9.2 per cent), Petroleum Products (6.6 per cent), Pharmaceuticals & Biotechnology (5.9 per cent), Diversified FMCG (5.7 per cent), Automobiles (4.8 per cent), Finance (4.5 per cent), Telecom (4.4 per cent) and Construction Project (3.9 per cent). Overall, the fund appears overweight financials, healthcare and telecom, while being underweight materials, consumer discretionary and IT.
Stock wise, the fund’s top-10 holdings account for 56 per cent of allocation, with currently ICICI Bank, HDFC Bank, RIL, NTPC, Infosys, ITC, Axis Bank, Bharti Airtel, L&T and Coal India being the biggest exposures. Compared to category, the fund has higher allocations in ICICI Bank, NTPC, ITC, Axis Bank, Bharti and L&T. While the fund has 65-66 per cent portfolio overlap with the benchmark (due to narrow 100 large-cap stock universe), the scheme has tweaked stock weights that suits its strategy. In the last few months, HDFC Top 100 has added stocks such as United Spirits and Kotak Mahindra Bank, while removing exposures to Hero MotoCorp, HPCL, REC, HDFC Life and Tata Communications.
Thus, given the fund’s return prospects, investors with 5 years+ horizon can invest in HDFC Top 100 through the SIP route.
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