HSBC Dynamic Fund
The dynamic environment which we live in today has instinctively made us flexible. We rather prefer to malleable, than rigid given the benefit it has to offer. Assessing the merits of being flexible, today mutual fund houses too are incorporating this aspect as an investment mandate, while managing investors hard earned money. They (mutual fund houses) believe it will help them to manage assets better and improve the overall performance of the fund. There seems to be recognition to the view that, instead of being static in asset allocation (by following a set asset allocation range across asset classes), it is better to go fluid while managing investors hard earned money, as an adverse turn in the equity markets, can prove fatal while managing wealth.
Mandated to follow a flexible investment style, HSBC Dynamic Fund (HDF) is one such open-ended fund that aims to invest predominantly in equities under normal circumstances but may quickly move 100% of its assets in debt and money market instruments. The HDF may also use derivatives with an aim to protect downside risk when the fund manager holds a bearish view on the equity markets. HDF follows the blend style (i.e. combination of growth and value) of investing and has been in existence for over 4 years now.
| Type of scheme | Open-ended |
| Category | Diversified equity |
| Sub-category | Flexi Style |
| Style | Blend |
| Launch date | 24-Sep-07 |
| Risk-Return proposition | Low Risk-Low Return |
Investment Objective and Proposition
The fund’s primary investment objective is “to provide long term capital appreciation by allocating funds in equity and equity related instruments. It also has the flexibility to move, entirely if required, into debt instruments in times that the view on equity markets seems negative.”
Portfolio Characteristics
In the last one year, exposure of HDF to large caps has ranged between 76.0%-91.0% of its assets. While its midcap exposure was has been in the range of 5.0%-14.0%. However, despite being a dynamic assets fund, its exposure to debt and cash has remained in the range of 1.0%-19.0%. In other words, for the most part of the year, the fund held above 80% of its portfolio in equities.
While buying stocks for its portfolio, HDF follows a combination of top down and bottom-up approach whereby investments are pursued in select sectors based on the investment team’s analysis of business cycles, regulatory reforms, competitive advantage etc. While shortlisting stocks from among these sectors, the fund manager focuses on:
- Fundamentals of the business
- Industry structure
- Quality of management
- Sensitivity to economic factors
- Financial strength of the company
- Key earnings drivers.
- The operating environment of the company
- Past track record as well as the future prospects of the issuer
- Short as well as long-term financial health of the issuer
Equity Portfolio
| Holdings | Nov 2011 | Dec 2011 | Jan 2012 | Feb 2012 | Mar 2012 |
|---|---|---|---|---|---|
| Infosys Ltd. | 6.2 | 6.9 | 6.1 | 6.0 | 6.4 |
| HDFC Bank Ltd. | 7.5 | 7.5 | 6.5 | 6.6 | 6.2 |
| ITC Ltd. | 7.4 | 7.8 | 6.6 | 5.8 | 6.0 |
| Reliance Industries Ltd. | 5.8 | 5.4 | 6.0 | 5.2 | 5.0 |
| ICICI Bank Ltd. | 3.5 | 3.5 | 4.4 | 4.5 | 4.8 |
| State Bank Of India | 3.4 | 3.3 | 4.0 | 4.4 | 4.5 |
| Bank Of Baroda | 3.8 | 3.8 | 4.0 | 4.4 | 4.2 |
| Oil & Natural Gas Corpn. Ltd. | 3.5 | 3.5 | 3.6 | 3.9 | 3.8 |
| Tata Motors Ltd. | - | - | 2.9 | 3.3 | 3.6 |
| Bharti Airtel Ltd. | 5.5 | 5.1 | 5.1 | 5.0 | 3.6 |
Top 10 holdings (in %) on March 30, 2012
(Source: ACE MF, PersonalFN Research)
As per the portfolio disclosed on March 30, 2012, the fund holds in all 27 stocks. Top-10 stocks constitute 48.1% of the portfolio, while its exposure to top-5 sector concentration has been 44.2% of its total portfolio. As on March 30, 2012, the large caps constituted 86.9% of the portfolio, while its exposure to mid and small caps was 5.3%, cash and cash equivalents assets were to the tune of 7.8% of the total portfolio. The fund manager of HDF has moderately churned the portfolio which is revealed by its portfolio turnover ratio of 1.27 times which is considered moderate.
How HDF has fared vis-à-vis its peers
| Scheme Name | 6-Mth (%) | 1-Yr (%) | 3-Yr (%) | 5-Yr (%) | Std. Dev. (%) | Sharpe Ratio |
|---|---|---|---|---|---|---|
| ICICI Pru Dynamic (G) | 3.9 | -4.3 | 22.3 | 9.2 | 5.54 | 0.26 |
| Franklin India Flexi Cap (G) | -0.3 | -7.5 | 21.3 | 7.8 | 7.08 | 0.21 |
| Birla SL Equity (G) | 0.1 | -9.7 | 17.0 | 4.6 | 7.58 | 0.16 |
| DWS Investment Opp (G) | -2.7 | -11.3 | 12.8 | 6.7 | 6.63 | 0.11 |
| Bharti AXA Equity (G) | -1.0 | -6.6 | 12.7 | - | 7.37 | 0.11 |
| HSBC Dynamic (G) | -0.3 | -7.0 | 12.0 | 5.25 | 0.12 | |
| BSE-200 | 0.1 | -9.0 | 16.7 | 5.1 | 7.49 | 0.15 |
(NAV data is as on May 02, 2012. Standard Deviation and Sharpe ratio is calculated over a 3-Yr period.
Risk-free rate is assumed to be 6.37%)
(Source: ACE MF, PersonalFN Research)
The table above reveals that HDF’s performance has been dismal. Over a 3-Yr time frame, the fund has generated returns at 12.0% CAGR, thereby underperforming its benchmark index – BSE- 200 with a distinct margin. On the volatility front, the fund has exposed its investors to low risk (as revealed by the Standard Deviation of 5.25%) thereby being less volatile than some of its peers in the category as well as its benchmark. On the risk-adjusted return parameter (as gauged by the Sharpe ratio), the returns appear ordinary in comparison with its peers as well as its benchmark.
| BULL PHASE | BEAR PHASE | BULL PHASE | CORRECTIVE PHASE | |
|---|---|---|---|---|
| 24-Sep-2007 - 09-Jan-2008 | 09-Jan-2008 - 09-Mar-2009 | 09-Mar-2009 - 05-Nov-2010 | 05-Nov-2010 - 02-May-2012 | |
| HSBC Dynamic (G) | 28.2% | -49.6% | 52.2% | -11.8% |
| ICICI Pru Dynamic (G) | 24.3% | -47.8% | 75.4% | -4.9% |
| BSE-200 | 31.4% | -59.0% | 84.4% | -13.8% |
(The returns expressed in the table above are CAGR)
(Source: ACE MF, PersonalFN Research)
Study of performance across market cycles reveals that HDF has performed reasonably well during the bear and corrective market phases. However, it has failed to outpace its benchmark in the bull market phases. On the other hand, its competitor, ICICI Prudential Dynamic has managed to outperform HDF over various market cycle phases with an exception.
Fund Manager Profile
| Name of the Fund Manager | Mr. Tushar Pradhan (Equity) | Mr. Sanjay Shah (Debt) |
| Total Work Experience | Over 16 years | Over 10 years |
| Managing the fund since | Sep-11 | Aug-09 |
| Qualifications | B.com, MBA (USA) | B.com, ACA |
(Source: SID, PersonalFN Research)
In a nutshell...
Although HDF has been less volatile than its benchmark- BSE 200; it has completely failed to impress on the returns front. Its consistent underperformance makes it one of the worst performing funds in the category of flexi cap and dynamic assets. Despite having a mandate to manage investors hard earned money in a flexible style, the fund hasn’t been able to provide advantage to its investors, when compared to the other funds in the category. Thus, it is imperative that thorough research and analysis precedes selecting a good performing flexi-cap style fund.
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