HDFC Mid-Cap Opportunities Fund needs no introduction to most fund investors. This 11+-year-old fund is one of the most consistent performers in the mid-cap category. In spite of its AUM almost doubling in the last couple of years, it has managed to stay afloat comfortably. Will it last? In this detailed performance review, let us find out how the fund has performed, especially in the recent past when its size grew too much, too soon. Btw this fund is part of My Handpicked Mutual Funds September 2018 (PlumbLine)
The fund has a mandate to invest 65% of its assets in mid-cap stocks and has reasonable room to invest the rest in other types of stocks, bonds and even real estate investment trusts. The mid-cap portfolio with a focus on (extract from the key information memorandum – page 11)
reasonable growth prospects
sound financial strength
sustainable business models
an acceptable valuation that offers a potential for capital appreciation
Yeah, that is vague! The fund is currently benchmarked to Nifty 100 Midcap TRI (I am not sure if this was the benchmark since inception). In what follows, I will use the regular plan for comparison with this benchmark. The performance of the direct plan will be at least 1% more.
Fund vs benchmark since inception
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That is pretty decent growth, but bear in mind this is valid only for NFO investors. So we need to dig deeper.
Has the fund beaten the benchmark consistently over 5 years in terms of return?
The answer is yes! Notice that the gap between the fund and index has narrowed in the recent past. In this period, the aum increased significantly. It is not possible to tell if the two are related and I will not speculate.
Has the fund beaten the benchmark consistently over 5 years in terms of risk?
This a rolling standard deviation plot (a measure of volatility, lower the better). The answer is yes, it has had lower volatility than the benchmark. Since HDFC Mid-Cap Opportunities Fund has outperformed in terms of return and risk, the expense paid to the AMC is justified.
Has the fund beaten the benchmark consistently over 10 years in terms of return?
Quite comfortably, although the history is short.
Has the fund beaten the benchmark consistently over 10 years in terms of risk?
oh yes, it has! However, this is the past.
How has the fund performed recently when its size almost doubled?
Looking at the two-year return, there is a noticeable slump from May 2016 (direct plan should have a bit better). The last time HDFC Mid-Cap Opportunities Fund has such a slump was during the 2008 crash. Will the fund recover or will investors have to adjust their expectations from the fund going forward? My guess (and it is only a guess), is that they will have lower expectations of outperformance.
How has HDFC Mid-Cap Opportunities Fund fared in the fingerprint analysis?
This again confirms the recent underperformance see above (at least by its own high past standards).
If the study is extended to since the fund started, we get:
There have been periods of such underperformance before. Notice also that the fund outperforms when the market is down and tends to underperform when the market is going up. This is fantastic! This means the downside risk of the investor is reduced.
Does the fund have downside protection?
Downside capture refers to how much of the index losses has the fund captured. So less than 100% is good here. Upside capture refers to how much of the index gains has the fund captured. So more than 100% is good here. Both capture ratios are plotted below since inception.
Consistently less than 100% downside capture and the same with upside capture too!! Again proves that return outperformance stems from downside protection primarily. Speaking of which, have a look at this video published yesterday about Low volatility stock investing
HDFC Mid-Cap Opportunities Fund vs Nifty Midcap 150 TRI
This is a slightly broader index and is the one I use for evaluating midcaps in the October 2018 Equity Mutual Fund Performance Screener. Here are the results:
5 years: Fund beat index 195/195 times (100%) with 100% downside protection
4 years: Fund beat index 402/438 times(92%) with 100% downside protection
3 years: Fund beat index 452/684 times (66%) with 100% downside protection
2 years: Fund beat index 602/927 (65%) times with 100% downside protection
1 years: Fund beat index 729/1176 (62%) times with 100% downside protection
That is pretty awesome. In all fairness to the fund, it is important to give it at least 3 years to outperform.
Update video version is now available
Summary
If you skipped all the above details and came straight here, good luck!
Existing investors: I think you should reduce expectations from this going forward as its size may be a problem. So far the fund has managed brilliantly but how long can it last? The problem is, that this fund has been so consistent in the past that it can only go down in future. So keep an eye and compare the performance of the fund with its benchmark from the date you started investing in the fund
New investors are likely to be disappointed in this fund if they go by past performance. There can, however, be no dispute that the fund has performed excellently so far.
Invest in this fund only if you have moderate expectations and do not have any other midcap fund in your portfolio.
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