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Business News/ Money / Personal-finance/  Why HDFC Bank is the top holding for 107 equity diversified schemes
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Why HDFC Bank is the top holding for 107 equity diversified schemes

HDFC Bank also figures among the top 5 holdings for 133 funds. What makes the stock so popular?

Experts suggest that HDFC Bank is a safe stock and under-allocation to it can lead to risk of under-performance in the short term. Photo: MintPremium
Experts suggest that HDFC Bank is a safe stock and under-allocation to it can lead to risk of under-performance in the short term. Photo: Mint

HDFC Bank seems to be the most preferred stock to own in equity diversified portfolios. HDFC Bank is the top holding for at least 43% of the funds across nine equity diversified categories or 107 schemes and is among the top 5 holdings of 53% or 133 funds, as on 31 May 2018.

If you compare this to fund holdings, say, a year ago, in June 2017, HDFC Bank was the top holding in 73 funds and three years ago it featured as the top holding in 68 schemes among diversified equity categories. 

The data throws two questions: what makes HDFC Bank stock such a consensus pick across funds and if most of the funds behave so similarly, then where is the distinction that active management ought to bring to the table? 

Consistent performance 

Out of 55 equity analysts listed on Bloomberg who track this stock, 50 have given it a buy, three recommend hold and two sell. It’s no wonder that mutual fund houses, that along with their own research also rely on these reports, are lapping it up. But that’s not the only reason, it’s also a lack of options. 

According to the equity head of a mid-sized fund house, who did not want be identified, “The bank has delivered consistent earnings for two decades and probably has disappointed the least in earnings season. Its weight in the index has gone up over the years and being underweight means taking a performance risk." HDFC Bank is 10.25% of Nifty 50 and roughly 12.25% in Sensex. 

There is a lot of market uncertainty owing to both global and local factors. While the headline index value is moving up, rise in earnings growth in individual stocks has been selective. As a result, while some stocks are trading at very high or premium valuations, others don’t find enough demand. In a narrow market like this, replacing an 8-10% invested in a high-quality, high-earnings stock like HDFC Bank would mean finding at least 2-3 other stocks with similar performance expectation. 

“There is a willingness to hold HDFC Bank even at a slightly higher PE multiple as funds are evaluated on relative performance. It’s not just this stock, but if you see the top 10 holdings of schemes with large size, the list will look a lot like Nifty top 10 stocks. The choice is limited, no one has the courage to be under-allocated to HDFC Bank," said Vikas Gupta, founder and chief investment strategist – OmniScience Capital, an investment management firm. 

Experts suggest that HDFC Bank is a safe stock and under-allocation to it can lead to risk of under-performance in the short term. “For many it is a cyclical choice now. One wants to be comfortable in this market, which means owning stocks which are favourable today. With PSU banks suffering and Axis and ICICI Bank being out of favour, the options are limited in the sector," said another senior fund manager who did not want to be named. 

Active management alpha 

If many funds, despite their separate investment objectives and strategies, rely so heavily on allocating to one or even just a handful of similar stocks for 30-40% of the portfolio, then what value does that add for investors? 

Munish Randev, chief investment officer, Waterfield Advisors, a multi-family office and advisory firm, said, “Our analysis shows that the more diversified your fund portfolio is the closer you get to index-like holdings. The top 10 stocks from Nifty are available across MF and PMS (portfolio management services) portfolios. When you add up the overlapping stocks, single company exposure gets much larger in individual portfolios." 

Individual client portfolios are analysed for stocks that unintentionally get too high an allocation and schemes which contribute more of that stock are replaced with other good schemes, he added. 

While such an approach reduces the risk of over allocation, it is not something that many retail investors can do. Often, investors rely on the stated fund strategy to choose differentiated schemes to benefit from excess return, thanks to the fund manager’s stock selection. 

If so many of them choose the same stock as the top holding of their portfolio or similar stocks form their top 5-10 holdings, that too mirroring holdings of popular indices, where is the excess return from active stock selection? According to one of the fund managers quoted above, “Being close to the index on one security can’t be the sole contributor to alpha, there will always be other stocks which do that. However, deviation from the index can take away alpha. The industry’s problem is that consensus stocks find favour. It is the job of advisors, distributors and industry analysts to bring this out and hold fund managers responsible." 

Randev agreed that differentiation among schemes is reducing and exchange-traded funds can be a better option in categories where correlation in portfolios of active managers is high. However, there is comfort in consensus. “If your fund underperforms with HDFC Bank as a top holding you are less likely to be questioned and held responsible, than if it was a lesser known mid-cap stock as a top holding," said Gupta. 

It is not the stock you hold that matters, but how precisely you follow the investment strategy. A focused buy-and-hold strategy may have more merit than jumping into short-term opportunities and following the herd. Ajay Tyagi, executive vice president and fund manager, UTI Asset Management Co. Ltd, said, “Consistency in stock selection and staying for the long term is important. This might mean you stand out in certain market periods, but that discipline is important. Index funds have the benefit of being disciplined in a sense as index composition changes only once or twice a year. If active fund managers had that same discipline with better stock selection ability, it can work very well." 

What should you do? 

While many funds having overlapping top holdings may appear as lazy investing, it is hard for an average investor to judge a portfolio at an individual stock level. Ultimately investors want outperformance.

The overall risk-adjusted returns of the scheme is important. Over time, however, if the fund manager doesn’t differentiate the portfolio reasonably compared to the benchmark and others, it will get reflected in returns converging or even underperforming. If that happens consistently, the fund can fall out of favour.

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Published: 17 Jul 2018, 08:57 AM IST
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