HDFC Equity Fund

48x fund growth vs 7x for market: that's some alpha!

Kiran Kaushik, Executive Vice President, HDFC AMC

18th March 2017

19.19% vs 9.23% over last 22 years sounds impressive enough in terms of alpha generation. Put it in absolute numbers, and it becomes a staggering 48x vs 7x. That's the kind of wealth creation that HDFC Equity Fund has delivered over the last 22 years of its phenomenal history. And, as this open letter from Kiran and the appended presentation show, it has already taken fresh guard and is fully prepared for the next big cycle that the fund house sees playing out over the next 5-7 years.

Dear Associate,

HDFC Equity Fund is amongst the oldest and largest diversified equity funds in the country. It has an established track record of over 22 years. In this journey that commenced in 1995, ₹.10,000/- invested in the Fund has grown to ₹.4.76 lacs (48 times) at CAGR of 19.19% as on Dec 30, 2016 compared to ₹ 0.69 lacs (7 times) at a CAGR of 9.23% in NIFTY 500*. In this period, the Fund has experienced several events and market cycles like Lehman crises, Asian crisis, Brexit, several elections, IT boom and meltdown, Infra boom and meltdown, etc.

While the outperformance (48 times wealth creation vs 7 times in NIFTY 500 over 22 years) itself is large, equally noteworthy is the consistency with which the Fund has outperformed the markets. In fact, HDFC Equity Fund has the distinction of outperforming its benchmark in 19 out of 22 years since 1995, which is comparable to the best(refer slide 5 of the attached presentation). This has been possible due to a disciplined and consistent, fundamentals driven long term approach to investing that HDFC Mutual Fund is known for, a stable fund management team and being part of HDFC Group.

HDFC Equity Fund also has a track record of consistent dividends. The Fund has paid dividends in each of last 10 years**(refer slide 7).

Since inception of the Fund in 1995, an SIP of ₹ 2,000 per month in HDFC Equity Fund has grown to ₹ 1.03 crs while a similar SIP in NIFTY 500 would have grown to be ₹ 0.26 crs.

Cycles in Equity Markets

In the attached presentation, we highlight how equity markets in India have displayed 6-8 year cycles. It is probably for the first time that equity markets are analysed in this manner and we are confident that you will find this presentation very interesting and thought provoking.

Since 1995, when HDFC Equity Fund commenced its journey, equity markets in India have displayed three distinct cycles. In 1995-2000 IT stocks appreciated nearly 100 times and were clearly the leaders. Leadership changed around 2000 and in 2001-2007 period engineering, banks, commodity stocks were the new leaders; engineering stocks in this period went up nearly 30 times. Finally in 2008 -2015 leadership was with FMCG and pharma stocks and these sectors massively outperformed the markets. These leadership cycles have not surprisingly closely followed business performance which in turn has also been meaningfully impacted by the environment and macro-economic factors(refer slides 2 to 4).

In our opinion, with the sharp improvement in most macro-economic indicators (refer table below) the equity markets are now changing direction yet again and entering a new cycle that promises to be very different from the last cycle.

Low inflation and interest rates, stable commodity prices, low current account deficit and high Foreign Direct Investment (FDI) will support better profitability in a different set of businesses compared to the last cycle of 2008-15. Recent stock market trends also tend to validate this view.

HDFC Equity Fund has successfully navigated each of the three stock market cycles between 1995-2016 and has in fact substantially outperformed in each of these cycles (refer slide4). This was possible as the Fund invested in the next cycle ahead of markets. This time around as well, we read the changing environment early and the portfolio of HDFC Equity Fund is now well positioned for the rapidly changing environment in our opinion (refer slides 6 and8). The outperformance of the Fund in CY 2016 points in this direction as well.

Results of the last quarter (3QFY17) have recorded the highest profitgrowth in last 10 quarters for NIFTY 50. This growth was contributed largely by financials (36%), materials (32%), energy (33%) and industrials (15%). Contribution from FMCG and pharma was 2% and -0.5% respectively. This changing leadership in profit growth is in line with our expectations and portfolio positioning and validates once again the fund strategy.

Interestingly, equity markets have lagged nominal GDP growth for several years now. Between early 2008 and early 2017 GDP has grown 2.6 times (Source: Kotak Institutional Equities), while the S&P BSE SENSEX is up only 1.6 times. With a sharp fall in interest rates, improving growth outlook and signs of improving corporate profitability, the outlook for equity markets is positive. In our opinion therefore, there is merit in increasing allocation to equities (for those with a medium to long term view).

We would urge you to spend some time and read the attached presentation, specifically slides mentioned earlier. We are confident you will find the presentation useful.

*Past Performance may or may not be sustained in the future. HDFC Mutual Fund/AMC is not guaranteeing any returns on investments made in this Fund. In view of the individual circumstances and risk profile, each investor is advised to consult his/her professional advisor before making a decision to invest in the Scheme. For detailed performance please refer slide 23 of the attached presentation.

** All dividends are on face value of ? 10 per unit. After payment of the dividend, the per Unit NAV falls to the extent of the payout and statutory levy (if applicable). There is no assurance or guarantee to Unit holders as to rate/quantum of dividend distribution or that the dividends will be paid regularly.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.

Share this article