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Sibling Rivalry

Though managed by different individuals, these two HDFC offerings are fabulous performers in their space

It would be wise not to make any assumptions here. Just because we have two funds from the same fund house, falling in the same category and delivering almost identical returns in the recent past, it cannot be assumed that they have similar portfolios or even investment styles.

While both funds have been around for more than a decade, HDFC Prudence is a veteran in its space and pretty unbeatable in its reputation. HDFC Prudence was earlier Zurich India Prudence. In 2003, when HDFC took over the fund house, the fund was rechristened even as the fund manager stayed the same. HDFC Balanced was launched later by HDFC Mutual Fund. Since then these two have co-existed but on different terms altogether.

Consistency is the name of the game where HDFC Prudence is concerned. Of the total 16 years of its existence, the fund had just two annual underperformances. A phenomenal record indeed! Despite being a balanced fund, it has outperformed the Sensex and Nifty in 13 years.

HDFC Balanced has had a more rocky ride. It started off pretty decently in 2001 and 2002 but then had a series of annual underperformances. The year 2007 turned out to be bad for both, HDFC Balanced and HDFC Prudence. HDFC Balanced was the worst performer in its category that year. HDFC Prudence did not get beaten as hard but slipped to a third quartile slot. The very next year HDFC Balanced bounced back with a vengeance and has stubbornly held on to its top quartile position. HDFC Prudence took a little longer but by 2009 regained its lost glory.

With returns that match that of an all-equity diversified fund, it’s not surprising that HDFC Prudence manages the highest assets in its category. As on June 2011, the fund had `6131 crore under its management, equivalent to almost half of the category assets. HDFC Balanced lags way behind with a tiny base of `282 crore. The huge difference in the asset base of the two funds has resulted in different levels of diversification. HDFC Prudence has increased the number of stocks from 49 (January 2008) to 84 (June 2011). While HDFC Balanced has also done so, the number of stocks has touched 45 (June 2011) from 26 (May 2010). Nevertheless, the concentration in the top five holdings in HDFC Prudence is slightly on the higher side than HDFC Balanced. They account for 18 per cent of the portfolio in the case of HDFC Prudence but only 12 per cent in the case of HDFC Balanced. Having said that, both play it relatively safe by ensuring that individual stock bets do not cross 4 per cent of the portfolio.

However, there is aggression on other levels.

The higher equity allocation of HDFC Prudence has worked like a double-edged sword. It has enabled the fund deliver impressive returns during market rallies but hit it during market downturns. Its equity exposure is capped at 75 per cent and it largely touches it, averaging around 74 per cent since January 2007 and has never gone below 71 per cent.

On the other hand, HDFC Balanced follows a slightly conservative approach. Though its equity allocation can go up to 72 per cent, the fund has rarely touched that limit and has averaged around 66 per cent since 2001.

In HDFC Prudence the aggression even extends to the composition of the portfolio in terms of market cap allocation. Although recently it has increased exposure to large-cap stocks to around half of fund’s assets, it historically has been largely tilted towards mid and small caps. Even during the market meltdown of 2008, its average mid- and small-cap stock allocation was a bold three fourth of its equity portfolio.

HDFC Balanced has changed its complexion over time. It started off as a pure large-cap fund with an average allocation of over 90 per cent to large caps. From 2004, it began to lower this allocation but only after Chirag Setalvad took over in April 2007 did the fund start to have a more generous allocation to smaller fare. Currently, the fund has close to 40 per cent of its assets in large caps.

HDFC Prudence also takes stronger sectoral bets. The allocation to the top three sectors of the fund is 32 per cent while that of HDFC Balanced is 25 per cent. Barring very few occasions, the allocation of HDFC Balanced to a single sector has not exceeded 12 per cent since 2008 while it has crossed 15 per cent on many occasions in HDFC Prudence and has gone up to a maximum of 21 per cent (Financial Services-September 2009).

Interestingly, the aggression extends to the debt side as well. Currently, majority of HDFC Prudence’s debt allocation is in Government of India securities (G-Secs). These are long-term bets which are highly sensitive to interest rate changes and hence more volatile. The fund currently has 10.05 per cent of its total assets allocated to G-Secs, down from a high of 12.47 per cent in November 2010. On the other hand, G-Secs were introduced only in June 2010 in the portfolio of HDFC Balanced and currently corner less than 1 per cent of the portfolio. This one prefers casting its lot with Certificates of Deposit (CDs) which currently stand at 12.47 per cent. Currently, Prudence has 8.49 per cent in debentures while Balanced has 6.02 per cent.

Setalvad seems to have maneuvered the fund in the right direction. Over the past few years, it has been putting up a good show. This is where HDFC Prudence has an advantage - ever since its launch it has had one of the finest fund managers in the industry at the helm of affairs.

There’s no arguing with the numbers in either case. HDFC Prudence takes a more aggressive route but rewards its investors for the risk. Those who prefer a conservative approach with a balanced fund would be more comfortable with HDFC Balanced. Years ago, HDFC Prudence would have been the obvious choice. This point in time, the decision is completely investor centric.