12/21/2015

Why we continue to believe in HDFC Equity and HDFC Top 200

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AbouttheAuthor
Morningstar.inofferscomprehensivecoverageof
stocks,funds,andETFs,plusmarketnews,
economicanalysis,portfolioplanninginsights,and
investmentcommentary.

When we reiterated our Gold

rating for HDFC Top 200 and
HDFC Equity, we were taken
aback by the stern criticism to
our stance (see: 2 largecap
Golds from HDFC Mutual
Fund).

ContactAuthor|ViewarticlesbythisAuthor

Itwasimpliedthatourpositive
outlook on the funds indicated that we "did not want to mess with the market
leader" and that we tried too hard to "justify Prashant Jains underperformance".
Whilethatwassubjective,thereweresometechnicalaspectstoo,suchas"whywere
bothfundsclassifiedaslargecaps?"
Letsbehonest.Wereallydidnotexpecteveryonetobeonthesamepageasuson
thecontrary.ButourconcernisthattheissuesofcontentioncentreonMorningstars
coreresearchprinciples,whichwewouldliketoelucidateupon.
Morningstars analyst team works independently and objectively. The AMCs
position,asmarketleaderornot,hasabsolutelynoimpactontheanalysisof
theindividualfund.

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Whatwedobelieveisthatunderstandingafirmscultureisparamounttopredicting
stabilityinitsranks.Afirmscultureisdifficulttoassessatanyonepointintime,but
rather is a mosaic that you have to piece together over time through iterative, in
depthdiligence.
The research should yield answers to questions like whether the firm is primarily
focused on investing rather than assetgathering and if portfolio managers have
enoughskininthegamethroughfundownership.
InthecaseofHDFCAMC,roughlyhalfofthemanagerpayisvariableinnatureand
largely linked to performance. Appropriate time frames matching the strategy (such
as6months,12yearsforfixedincomefundsand3yearsandthemanagersstart
dateforequityfunds)areconsideredtoevaluateperformance.
WebelievethatHDFCAMCisanexcellentstewardofinvestorscapital.Itsreputation
hasbeenbuiltonadisciplinedinvestmentprocessandaconsistentlongtermfocus.
The bone of contention amongst a number of our readers has been the funds
performancethisyear.
We believe performance should be a single input into a process, not a
diviningrod. It really should play a confirmatory role. For instance, what does the
fund'strackrecordtellyouaboutitsinvestmentstyle?Whatdoesitrevealabouthow
the manager has executed his approach? Can you reconcile the way the fund has
performedtothemanager'sstatedinvestingdiscipline?
Becauseweviewperformanceinthecontextofstrategyandthemanagersintrinsic
investment style, we may still be convinced about a good fund despite it hitting a
roadblock.
In2007,HDFCTop200andHDFCEquityunderperformedthecategoryaverage.That
isbecauseJainstayedawayfrommomentumstocksininfrastructureandrealestate.
In2013,hisbetsonInfosysandSBIdidnotpayoffresultinginanunderperformance
that year. But this is typical of Jains style he does not get deterred in his
conviction, even if it means the funds slipping down the performance ladder for a
yearorso.
Thiscalendaryearhasbeenparticularlyroughonthefunds.Hishighconvictionbets

http://www.morningstar.in/posts/35246/why-we-continue-to-believe-in-hdfc-equity-and-hdfc-top-200.aspx?curator=alphaideas&utm_source=alphaideas

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12/21/2015

Why we continue to believe in HDFC Equity and HDFC Top 200

onbankingstocks,suchasSBIhislargestholding,havedetractedfromthisyears
performance.Thisisevidentwhenyoulookattheyeartodatereturns.Anditisthis
hitthathasbroughtdownthe5yearreturnstoamereaverage.

Looking at performance in conjunction with his investment approach, our analysts

havetheconfidencethatthisfundwillcontinuetodeliveroverthelongterm.
HDFCEquityhascompleted20yearsandHDFCTop200,19years.Bothfundshave
put up some excellent numbers over this period as well as over a 10year time
frame.Andwhilewehavebeenaccusedofbeingdesperatetojustifyourstanceby
talking about the impressive performance over the long term, we are blatantly
unapologeticofthefactthatequityinvestingmustnotbelookeduponwith
aninvestmenthorizonofafewyears.Onehastotakea5yearviewatthevery
least.
As for the technical aspect, there are various definitions as to what constitutes a
largecap stock. At Morningstar, largecap stocks are defined as the group that
accountsforthetop70%ofthecapitalisationofeachgeographicarea.Inthecaseof
MorningstarIndiathatwouldbeAsia,exJapan.
AsfarasHDFCTop200isconcerned,onanaverageoverthepast5years,88%of
theportfoliowascorneredbylargecapstocks.Thefigurestandsat74%inthecase
ofHDFCEquity.
Conclusion
MorningstarevaluatesfundsbasedonfivekeypillarsProcess,Performance,People,
Parent, and Pricewhich its analysts believe lead to funds that are more likely to
outperformoverthelongtermonariskadjustedbasis.
Process:Whatisthefund'sstrategyanddoesmanagementhaveacompetitive
advantageenablingittoexecutetheprocesswellandconsistentlyovertime?
Performance: Is the fund's performance pattern logical given its process? Has
the fund earned its keep with strong riskadjusted returns over relevant time
periods?
People:WhatisMorningstar'sassessmentofthemanager'stalent,tenure,and
resources?
Parent:Whatprioritiesprevailatthefirm?Stewardshiporsalesmanship?
Price: Is the fund a good value proposition compared with similar funds sold
throughsimilarchannels?
Thisanalystratingisnotamarketcallbutisbasedontheanalyst'sconvictioninthe
fund's ability to outperform its peer group and/or relevant benchmark on a risk
adjustedbasisoverthelongterm.
A Gold rating suggests the bestofbreed that distinguishes itself across the five
pillars and has garnered the analysts' highest level of conviction. It means
Morningstaranalyststhinkhighlyofthefundandexpectittooutperformoverafull
marketcycleofatleast5years.

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vishalrastogi

Itsreallygreattofindsuchanindepthanalysisofthefundweare

Dec202015

alreadyhavingstrongconfidence&convictiontowardsitsconsistency,

05:59AM

towardsitsfundmanagerdedication&theAMCtoo.........

ANISHMOHAN

Thanksformakinganelaborateandindepthanalysisandmakingussee

Dec162015

therationaleofyouranalysisofthefunds.Manypeoplehaveburnttheir

06:08PM

fingersbeingassociatedwiththisfundinthelastfewyearsand5years
ofunderperformancewouldcertainlymakeanypersonskepticalofthe
realcalibreofthisfund.So,sometimesitisrequiredtoassuagethe
readersthattheanalysisdonebyyouhavebeenbasedonsound
fundamentalswhichyouhavedonefelicitly.ThanksforthispostandI
feelluckytobefollowingyourpoststhatenrichesmyknowledgeand
conviction.

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Why we continue to believe in HDFC Equity and HDFC Top 200

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