Mid-Cap Marvels: How HDFC Turned Pocket Change into a Fortune

Brokerage Free Team • June 5, 2024 | 4 min read • 304 views

The HDFC Mid-Cap Opportunities Fund has shown remarkable performance. A monthly SIP of Rs 10,000 from January 2014 to January 2024 would have grown a 12 lakh investment to over 37 lakh, translating to an XIRR of 21.39%.

 

In the last year alone, from January 2023 to January 2024, the fund’s AUM grew by more than 66%. This growth presents a challenge as the fund manager must find more investment opportunities, especially given the limited size and liquidity of small and mid-cap companies, which restrict large investments in these stocks due to higher impact costs.

 

Let’s explore how the fund manager has handled this influx and its impact on investment strategy and performance.

 

Historical Performance of HDFC Mid-Cap Opportunities Fund

 

The trailing returns chart shows the fund outperforming both its benchmark and category average over 3, 5, and 10-year periods. This is significant as many mid-cap funds struggle to beat the NIFTY 150 Midcap index, with the category average often falling short of the benchmark.

 

Rolling Returns

Among 22 schemes, only 7 outperformed the benchmark, with HDFC Midcap Opportunities being one of them.

 

7-Year Rolling Return Comparison
Scheme Name Rolling Returns (in % p.a)
Kotak Emerging Equity Fund 19.34
Axis Midcap Fund 18.55
Edelweiss Mid Cap Fund 18.51
PGIM India Midcap Opp Fund 18.29
Invesco India Midcap Fund 18.27
Tata Mid Cap Growth Fund 17.14
HDFC Mid-Cap Opportunities Fund 17.09
Nifty Midcap 150 TRI 16.98
HSBC Midcap Fund 16.87
DSP Midcap Fund 16.77
Baroda BNP Paribas Mid Cap Fund 16.71
Nippon India Growth Fund 16.42
Motilal Oswal Midcap Fund 16.41
UTI Mid Cap Fund 16.3
Taurus Mid Cap Fund 16.21
SBI Magnum Midcap Fund 16.16
Quant Mid Cap Fund 15.94
ICICI Pru Midcap Fund 15.87
Franklin India Prima Fund 15.58
Sundaram Mid Cap Fund 14.58
LIC MF Midcap Fund 14.27
Sundaram Mid Cap Fund 14.24
Aditya Birla SL Midcap Fund 13.89

Rolling Returns Period : 1st Jan, 2013 to 1st Jan, 2024

 

Downside Protection

To evaluate downside protection, we examined periods where the Midcap index dropped by 5% or more since 2013. In 10 of the 12 periods, the HDFC Mid-Cap Opportunities Fund outperformed the index.

 

Periods when Nifty Midcap 150 corrected by more than 5%

 

From Date To Date Nifty Midcap 150 – TRI Returns (in %) HDFC Mid-Cap Opportunities Fund Returns (in %)
16-Aug-2022 27-Mar-2023 -5.48 0.65
15-Jul-2021 17-Jun-2022 -5.86 -3.17
18-Mar-2020 23-Mar-2020 -12.83 -13.14
17-Mar-2020 18-Mar-2020 -5.35 -4.94
12-Mar-2020 17-Mar-2020 -6.01 -5.75
05-Oct-2018 12-Mar-2020 -6.01 -4.52
28-Sep-2018 05-Oct-2018 -5.31 -4.4
24-Oct-2017 28-Sep-2018 -5.8 -4.44
07-May-2015 12-Feb-2016 -5.52 -6.63
19-Jan-2015 07-May-2015 -5.07 -3.91
24-Jun-2013 06-Aug-2013 -7.24 -6.31
26-Feb-2013 24-Jun-2013 -7.4 -3.03

 

This analysis indicates that the fund offers solid downside protection.

 

Investment Style

As per SEBI guidelines, mid-cap schemes must invest at least 65% of their assets in mid-cap stocks. HDFC Midcap Opportunities Fund has consistently maintained a 65-70% allocation to mid-caps, with 15-28% in small caps and 4-14% in large caps. Recently, the large-cap allocation increased to over 10%, possibly due to substantial inflows or high mid and small-cap valuations.

 

 

Portfolio Turnover Ratio

A lower turnover ratio suggests high conviction in stock selections. As of January 2024, the HDFC Midcap Opportunities Fund had a turnover ratio of 19, significantly lower than the category's highest turnover ratio of 342 from the Quant Mid Cap Fund. This indicates a strong buy-and-hold strategy.

 

Top 10 Stock Holdings

The top 10 stocks, many held since 2018, have delivered impressive returns.

 

Company Name Jan-24 Jan-23 Jan-22 Jan-21 Jan-20 Jan-19 Jan-18
The Indian Hotels Company 3.9 4.4 3.6 2.2 2.5 2.7 1.9
Apollo Tyres 3.8 3.1 2.2 2 1.3 1.8 1.6
Max Healthcare Institute 3.2 3.6 3.6        
The Federal Bank 3.1 2.4 1.8 1.2 1.5 1.7 1.7
Tata Communications 3 3.1 1.4        
Coforge 2.9 2.1   0.5 0.5 1.3 1.6
Indian Bank 2.9 2.6 0.7 0.5 0.6 1.5 2
Max Financial Services 2.8 2.8 2.9 2.8 1.9 1.7 1.6
Persistent Systems 2.6 2.4 2.6 1.3 0.4 0.4 0.6
Hindustan Petroleum Corporation 2.6 1.2 1.1       1

Profits for Max Healthcare Institute, Tata Communications, and HPCL calculated from January 2022 to January 2024.

 

Diversification Strategy

The fund has maintained around 70 stocks over the past five years, higher than the category average, suggesting a diversified approach. This strategy mitigates risk by reducing the impact of individual stock movements on overall returns. Despite the fund’s significant growth in AUM, the number of stocks has remained stable, indicating a consistent investment approach.

 

Overall, the HDFC Midcap Opportunities Fund has successfully navigated increased inflows and maintained strong performance through a diversified portfolio and a high-conviction, low-turnover investment strategy. How this strategy fares in the current market cycle remains to be seen.

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