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Sunday, July 08, 2001













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HDFC Growth Fund: Hold

Recommendation: Hold

Aarati Krishnan

HDFC Growth Fund has trailed the narrow market indices, such as the BSE Sensitive Index and the S&P CNX Nifty, over the past six months.

This is disturbing, especially because the fund had a significant cash position even as late as November 2000.

This should normally have shielded the NAV from the declining equity values. However, since the fund is still in its first year of operation, it is early days yet to judge the performance. Investors in the fund can retain their units for the present.

Portfolio overview: A study of the fund' portfolio over the past 10 months reveals the following features:

*As the fund was launched after the meltdown in the technology sector and the broad market was well underway, it has not started out with as much of a handicap in timing as other funds which debuted at the peak of the IT boom.

*The fund has consistently remained diversified, both in its stock-specific and sectoral exposures. No single stock has accounted for over 8 per cent of the net assets since launch, and sectoral allocations have been pegged at less than 20 per cent to each sector, except on a single occasion when the fund was overweight in IT stocks.

*The fund started out with a high cash position in the initial months which has gradually been invested in equities. This phasing out of investments, at a time when the broad market was on a steady decline would have helped bring down the cost of the initial portfolio.

*The fund's cash position declined from 64 per cent of the net assets in September 2000 to around 37 per cent by November 2000. However, it continues to be wary of the equity market, and had acquired a small debt exposure in addition to a significant cash position.

*By May 2001, the fund had around 13 per cent of its net assets invested in cash equivalents and debt. The fund had stipulated at the time of its initial offer that it may invest up to 20 per cent of its assets in debt or cash equivalents.

*HDFC Growth Fund has remained consistently overweight in the FMCG sector, with sectoral allocations rising from 15 to 22 per cent of net assets between September 2000 and May 2001. Given the signs of a distinct slowdown in this sector and relatively high price earnings multiples of these stocks, this part of the portfolio could make for limited upside potential.

*In contrast, the fund has changed its stance on IT stocks quite dramatically since its launch. After starting out with an IT exposure of 18 per cent in September 2000, the fund pegged up its IT exposure to around 21 per cent by February 2001, but subsequently trimmed this sharply to around 5 per cent of the assets. This strategy could have cost the fund in terms of performance, since the high IT exposure in February 2001 would have made the fund particularly vulnerable to the subsequent markdown in these stocks.

*In place of IT stocks, the fund has acquired a range of pharma and cyclical stocks over the past three months. Capital goods, cement and metals are some of the sectors where the fund acquired fresh exposures. This has led to a considerable churning in the ranks of the fund's top holdings, where stocks such as NIIT and Visualsoft have been replaced with the likes of Hoechst Marion, Marico and ITC.

*The stock selection strategy has been rather unconventional with the fund including some stocks which do not normally figure in the fund portfolios. ITW Signode, Unichem Labs, MRO-TEK and Marico Industries are a few instances of this.


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Fund facts: HDFC Growth Fund, an open-end fund, was launched in August 2000. The fund charges an entry load of 2 per cent on fresh sale of units, but levies no exit load at present. The fund is medium-sized with a corpus of Rs 112 crore by end of May 2001.


Section  : Mutual Funds
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