There appears to be striking similarity between the top two largest equity funds in the Rs 6.42 trillion Indian mutual funds (MF) industry. HDFC Top 200 Fund (HT200; corpus size of Rs 10,692.11 crore) and HDFC Equity Fund (HEF; corpus size Rs 9,432.92 crore) are part of the same fund house, HDFC Asset Management Co. (AMC) Ltd (the largest fund house as per figures released by the Association of Mutual Funds of India, or Amfi, the MF industry body) and both these schemes are managed by Prashant Jain, chief investment officer, HDFC AMC.
If you had invested Rs 10,000 every month in both these schemes 10 years back, you would have got Rs 47.35 lakh in HT200 (26.15% returns) and Rs 47.09 lakh (26.05% returns) in HEF. Both these schemes are a part of Mint50; a basket of schemes that we recommend our investors to pick and choose from. Should you, then, invest in both of them?
Though the returns from both these schemes seem to have converged in the long run, that’s not entirely intentional as HEF and HT200 have different objectives. HT200 is a diversified equity fund that benchmarks itself against BSE 200 index. As per its mandate, the common holding between its own holdings and that of its benchmark index (BSE 200) should be at least 60%. For instance, if Infosys Ltd constitutes 5% of BSE 200 and 7% of the fund, the common holding is 5%. It’s a mandate that doesn’t hug the benchmark index, but restricts the risks a typical equity fund can take on.
File photo of an HDFC Bank Ltd. branch in Mumbai. Bloomberg.
HEF, on the other hand, is an aggressively managed large-cap-oriented equity fund. It invests 60-65% of its corpus in large-cap scrips and the rest in mid- and small- cap companies. “We don’t shy from straying away from the benchmark index in HDFC Equity because we don’t hug the benchmark index. Some of our mid-cap holdings have done very well for us in HDFC Equity fund over the years,” says fund manager Prashant Jain.
HEF was launched in December 1994 by the erstwhile Twentieth Century Asset Management Co. Ltd when it started its operations in the Indian MF industry; the scheme went by the name of Centurion Equity Fund in those days. Prashant Jain, along with his former colleagues Chandresh Nigam (who now heads Axis Asset Management Co Ltd’s equity funds) and E.A. Sundaram, used to manage this fund in the initial years, up till February 1999 when Zurich India Asset Management Co. Ltd acquired it. Then, Nigam alone managed this scheme till June 2003 when HDFC AMC acquired it. Nigam, unlike Jain, did not join HDFC AMC and so the scheme fell in Jain’s lap, who has been managing it ever since.
In the meantime, another fund house ITC Threadneedle Asset Management Co. Ltd had launched ITC Threadneedle Top 200 in October 1996. Bobby Surendranath managed it back then, till 2001. In the interim, Zurich AMC acquired ITC Threadneedle and rechristened the scheme as Zurich India Top 200 Fund in December 1999. After Surendranath quit Zurich AMC (he later worked in Standard Chartered AMC when the latter entered the Indian MF industry and was eventually rechristened as IDFC AMC) in the middle of 2001, Jain started to manage this fund too.
…reach the same goal
More than 10 years since the schemes were launched, a look at their past returns seems to suggest that both the schemes have given similar returns over longer time periods (see graph). Additionally, we looked at the schemes’ rolling returns; a string of one-year and three-year returns over the past six years; returns calculated at the end of every quarter between June 2004 and the present to look for any patterns. On an average, the difference between the two schemes was barely two percentage points on a three-year basis. That both these funds are the two largest equity schemes in the Indian MF industry further bridges the gap between the two.
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But returns between two or more funds can be similar for a number of reasons. We looked at the funds’ portfolios to check out for any similarities there. We checked out both the schemes’ portfolios—specifically their top 20 holdings--from December 2007 till date. Of the top 20 stocks both these schemes have held, 14 stocks have been common on an average (see graph). As on 10 June, 16 of the top 20 stocks were common across both schemes’ portfolios. Their percentage holdings are also high. For instance, as per their August 2011 portfolios, the 14 common stocks account for 50.31% of HEF’s portfolio and 47.94% of HT200’s portfolio. “When two or more schemes are managed by the same fund manager for such a long time, portfolios are bound to look the same. For instance, sectors like banking and pharmaceuticals—two of the most commonly prominent sectors in diversified equity funds in the past two years—will generally have almost the same exposure,” says Sachin Jain, research analyst, ICICI Securities Ltd. He claims that the top 20%, 30% or 40% of exposure in two such schemes would have little difference.
Method in madness
But not all believe that both the funds are similar. The head of research of the private banking division of a private sector bank that has consistently recommended both these schemes—much like Mint 50—suggests that investors should also look at their volatility. “HEF is usually more volatile than HT200 as the former can also invest in mid-caps,” he says on condition of anonymity because he is not permitted to speak to the media. In rising markets, such as in 2006 and 2007, HEF was more volatile than HT200; a statistic (as per data provided by Value Express) best represented by a ratio called the Sortino ratio. The head of research who spoke to us says that his private banking unit, despite both these schemes making it to their recommendation list, suggests HEF to aggressive investors and HT200 to conservative investors.
Jain of HDFC AMC agrees: “As a result of the difference in risk profiles, the year-on-year difference in performance can be visible. Typically, if the index does well, HT200 will outperform. Whenever the index doesn’t do well, HEF will outperform.” Jain is quick to add that in the past 10 years, a well-performing index has led to HT200’s performance, while a mid-cap exposure has boded well for HEF.
Jain of ICICI Securities adds that a high corpus size of both these schemes also bridges the gap. “Since the corpuses of these schemes hover around the Rs 10,000 crore mark, it’s difficult to make two very different portfolios. For instance, the top scrips would be among the most liquid stocks. Since the scheme is managed by the same human being, these names would be more or less similar.”
But Jain of HDFC AMC disagrees. “Size doesn’t matter,” he says. “Even today, HEF is far away from the benchmark index; scrips such as Reliance Industries Ltd, ITC, State Bank of India and so on, have difference weightages in the benchmark index and in HEF.” And here’s where the difference, he claims, comes about when top schemes across fund houses are compared. “The top 40-60% of the portfolio will be common across many top schemes across fund houses. But the bottom 20-30% of the portfolio is where the difference arises.”
What should you do?
Financial planners and analysts are divided on whether you choose one of the two or both. “The objectives of both these schemes are different. Today, HEF is heavily skewed towards large-cap scrips. But going ahead if mid-cap stocks become cheaper, we may see HEF getting into mid-caps. Hence, the risk-return parameters can get very different,” says Rupesh Nagra, head (investments and products), Alchemy Capital Management Ltd. He feels that investors can invest in both these funds.
Jiju Vidyadharan, head (funds and fixed income research), Crisil Research, too feels that both these schemes can be a part of your portfolio, but for a slightly different reason. “While, these schemes have different objectives, both have delivered largely similar returns because over the last 2 years, HEF has consistently increased its allocation towards large-caps. However, both these schemes have done well in their respective categories and have been delivering consistent returns. Investors can thus choose to invest in both of them as you don’t want to diversify (among fund houses) just for the sake of it.”
On the other hand, Jain of ICICI Securities—much like the private banker above—says that they usually recommend one scheme. “Aggressive investors may go for HEF, while conservative investors may go for HT200,” he says.
While there’s no right or wrong in it—and a bad scheme is bad till we have proof on hands that things are getting sour, which is not the case with HDFC AMC—we find very little to choose between the two. But if two gigantic schemes with similarities in mandates are managed by the same fund manager for years, expect some duplication. In which case, we feel it’s best if you choose one and diversify across fund houses to get more variety.
Ashwin Ramarathinam contributed to the story