When we met with the management of HSBC Mutual Fund and discussions on HSBC Equity surfaced, upfront we were reminded to look at the returns of the scheme since its launch. As on August 5, 2011, this fund delivered an annualized return of 30 per cent since its launch, a very impressive figure indeed. However, if one takes a look at the current trailing returns, it throws up a completely different picture. Its three-, two- and one-year returns are below the category average while the more recent ones are on par with it.
Though the fund has rewarded its long-term investors and those who stuck with it all through the years since its inception, it has taken a fairly rocky path and evolved quite a bit from what it was when it was launched.
The fund debuted in style. It shamelessly thrashed the competition in 2003 and 2004 by putting itself amongst the top three performers in both those years. Its mid-cap bets helped augment returns. Investors noticed and flocked to this fund which was apparent in its growing corpus size. It started off in December 2002 with little less than Rs 36 crore and within 24 months had a corpus of around Rs 1,600 crore.
Those were the good days. Not only was it at its peak in terms of performance but even in corpus which today stands at a diminished figure of less than Rs 900 crore.
Come 2005 and the fund faltered in the first two quarters and even though it picked up in the last two, it found itself shoved from a chart topper to a third quartile position (annual returns). After that one could say that its performance has been in line with the category average.
In 2006, the fund underwent a number of fund manager changes which got reflected in the investment style. The most dramatic transformation occurred when Viresh Mehta took over the reins for three months before being replaced. The portfolio began to get leaner; from around 60 stocks at the start of 2006, it went down to 30 by the end of that year. Yet, the high allocations to individual stocks decreased. The large-cap bias got all the more distinct along with a rise in cash allocations. Stocks like Kochi Refineries, Lupin, Mahindra Ugine Steel, Marksans Pharma, Mphasis, NIIT Technologies, Patni Computers, Reliance Capital Ventures, Syndicate Bank, and AIA Engineering moved out never to appear since.
A blip in the history of this fund is 2009 when it performed abysmally. A fourth quartile performer, it found itself ranked 56 (out of 61). It delivered around 58 per cent when the category average stood at 80 per cent and the best fund in this category (Principal Large Cap) delivered 110 per cent.
That year the fund got its calls wrong. HSBC Equity played it safe when it seemed like the financial crisis had no end to it. Between September and December 2008, its equity allocation dropped from 90 per cent to 75 per cent. In March 2009, when the market began to rally, its equity allocation was still at the around the same levels and was upped to 90 per cent only by August, a move which caused it to miss out on the initial run.
Taking a defensive stance because the fund management was of the view that the elections would result in a hung parliament with no reforms being pushed ahead in the Budget, the portfolio was heavy on cash and high on Consumer Durables, Consumer Staples and Pharma. Exposure to the FMCG sector averaged around 15 per cent in 2009 while the BSE FMCG was the worst performing sector index that year. Apart from this, the fund had a very low exposure to the top performing sectors of that year - Auto, Metals and Technology.
The fund paid a heavy price for this. Barring the first quarter of 2009, it underperformed the category average the remaining three quarters. But by 2010 its quarterly returns show that it was back to category average performances. However, if one looks at rolling returns, due to the hit it took in those three quarters, the returns will pale in comparison to its better performing peers. As long as those quarters form part of the assessment set, the returns will get affected since the echo of that call continues.
Expectations from this fund
This fund has evolved over the years. If you had invested in this fund at inception, you would be invested in a very different offering today. When the fund was launched, it had significant allocations to mid caps, way above the category average. It never started off as a large-cap fund, in fact its categorization put it in the ‘Equity: Large & Mid Cap’ category.
Since launch the fund was a blended portfolio of large- and mid-cap stocks as it has the leeway to invest across the market capitalization. But in the second half of 2006, it increased the exposure to large-cap stocks from around half (March 2006) of the fund’s portfolio to over 80 per cent (May 2006) and it has never gone below that after that. Since May 2006, the large-cap exposure of the fund has averaged around 86 per cent and currently the fund is holding 93 per cent of its portfolio in large caps.
The increased exposure to large-cap stocks has enabled the fund to make the portfolio slightly more concentrated than it was in the past. The number of stocks in the fund now ranges between 26 to 37, a significant change from the days when it went up to 71 stocks (May 2004). But interestingly it has not increased the concentration of the top five holdings; at around 30 per cent of the portfolio over the past one month, it’s in line with its category average. The fund managers now emphasize that their primary approach is to focus on quality picks. The asset management company (AMC) positions HSBC Equity as a quality large-cap fund. Of course, the debate on what makes a “quality” stock is open to much interpretation, however no one will disagree that all large caps are not high quality picks. The team works with the assumption that over longer periods of time, high quality large caps will reward investors.
Avoiding undue risk
While the fund is not the worst in its category, neither can one look forward to the stellar numbers it delivered in its initial years.
Conservative investors who want a large-cap exposure, a portfolio that is not churned much and are happy with a middle-of-the-road performance as long as too much risk is not taken will be right at home here.
This offering is best viewed as a low-risk way to participate in stock market rallies without having to endure the depths of the bear market plunges. The team endeavours to work towards consistent performance over the long term while ensuring appropriate risk controls to limit downside in a market downturn. As a result, it tends to appear as a more risk-averse fund that focuses on large-cap, liquid and high quality stocks. And in the long run, the average performances should logically reward investors with a reasonable return.