Who doesn’t know HDFC Midcap Opportunities fund? It is one of the star funds of HDFC MF.
The AUM of this fund now stands at Rs. 17,715 crores, the largest in the midcap category. In fact, on the basis of AUM size, the next fund in the midcap funds category is less than Rs. 6,000 crores. That how big the gap is and that’s how popular the fund is.
The fund started its journey in July 2007, at the height of the previous bull market. The investment objective of the fund, as per its Scheme Information Document (SID), is:
To generate long-term capital appreciation from a portfolio that is substantially constituted of equity and equity related securities of Small and Mid-Cap companies.
The fund seeks to carve a niche in the mid and small cap space. However, the fund rightfully sounds caution.
This is what the SID also mentions as a part of its risk factors:
While Small & Mid-cap stocks gives one an opportunity to go beyond the usual large blue chip stocks and present possible higher capital appreciation, it is important to note that Small & Mid-cap stocks can be riskier and more volatile on a relative basis. Therefore, the risk levels of investing in Small & Mid-cap stocks are more than investing in stocks of large well- established companies.
It should be noted that over a period of time, Small, Mid and Large cap stocks have demonstrated different levels of volatility and investment returns. And it is important to note that generally, no one class consistently outperforms the others.
Asset Allocation of HDFC Midcap Opportunities Fund
The suggested asset allocation (as per the SID) of the fund also conveys the same idea.
The fund does not have a specific definition of what a large, mid or small cap stock means. Most likely it follows the market parlance on the same.
But this leaves a lot of room for the fund to define its own way to categorise a stock. In Unovest’s view, the fund has mostly violated its own norms, with a higher share of large cap stock holdings.
The following is the allocation of market cap based on last reported holdings data.
The chosen benchmark of the fund is Nifty Free Float Midcap 100. The other benchmark used by midcap funds is the BSE S&P Midcap Index.
The current fund managers are Chirag Setalvad (over 20 years of investment experience, almost all with HDFC MF) and Rakesh Vyas (over 10 years of investment experience).
Expenses and Turnover ratio of HDFC Midcap Opportunities Fund
While the turnover ratio is a reason for appreciation, the expenses are not.
Source: Unovest Research. Monthly data points from Dec 2014 to July 2017. Direct plans only.
As you can see with the turnover numbers, the fund follows a buy and hold strategy. The year 2016 was an anomaly though. The fund had very high turnover in a large part of the year – close to 300% once.
The turnover otherwise has been below 30%. To understand it in another way, any stock stays for about 3+ years in its portfolio.
Now when it comes to expenses, the fund leaves a lot for asking. The latest expense ratio of the direct plan of the fund is 1.13%. As a fund which has grown t0 humongous size, the fund can work with a lower expense ratio. At some point, the fund did work with an expense ratio of close to 0.5% (almost 2 years ago).
We will not talk about the performance numbers. Enough has been said about how impressive they are.
There is one big problem no one is talking about.
Given the impressive past performance, brand HDFC and the fact that most investors rely on just past performance to make their investment decisions, the fund size is only going to grow further.
In just last 3 months, it has added over Rs. 1,000 crores to its AUM.
Please note, for a mid cap fund, large size can be its Achilles heel.
You see, in the entire stock market size of say 100%, about 80 to 85% of the market capitalisation is contributed by large cap companies. About 15% is contributed by mid cap companies and the rest by small and micro cap companies.
With such a limited market size for the mid cap space, a fund such as HDFC Midcap Opportunities Fund with its size is going to have problems finding investment “opportunities“, sooner than later.
ICICI Pru Value Discovery Fund did the same thing. This Value Discovery fund, which started its journey as a midcap fund in Aug 2004, was forced to convert itself into a multicap fund in 2015. Driven by its past performance, it received huge fund flows (it crossed Rs. 10,000 crores in AUM).
But wait! Once it converts into a multicap fund, the returns are going to become muted compared to its midcap avatar. After all, midcaps are expected to have a higher risk-reward ratio.
I am more interested in what are you going to do as an investor. Do share your views in the comments.