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HDFC Small & Midcap Fund (An open ended equity scheme)
Potential Comes in all Sizes
20th February, 2015
*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.
Note: Risk is represented as:
(BLUE) investors understand that their principal will be at low risk
(YELLOW) investors understand that their principal will be at medium risk
(BROWN) investors understand that their principal will be at high risk
HDFC Small & Midcap Fund is suitable for investors who are seeking*:
Capital appreciation over long term. Investment predominantly in equity and equity related instruments of Small-
Cap and Mid-Cap companies. High risk (BROWN)
Fund History – A Brief Overview
• Launched as Morgan Stanley A.C.E. Fund on April 3, 2008.
• The A.C.E. fund was a multi-cap fund.
• Scheme acquired by HDFC Mutual Fund effective close of business hours on June 27th 2014.
• Repositioned as HDFC Small & Mid-cap Fund.
• Investment strategy modified to focus on small and midcap stocks.
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The Open Secret
• Small & Midcap stocks are often under-owned, under-researched and misunderstood.
• Stock picking with a long term fundamental view is a tough skill to master especially in the midcap and small-cap space.
• Volatility in the short term can be high but a long term perspective helps to buy on dips.
• Increased familiarity, larger size, changing fundamentals and better disclosures can result in a re-rating of the business.
…Several examples in the past give us confidence that these secrets can be found “Again”.
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Finding the next opportunities/niche companies.
A Specialty Textile Manufacturer
A Stable Agri-chemicals Provider
Niche textile manufacturer with a strong export focus.
A rural business model focused on distribution of agriculture inputs.
Rapidly growing business across multiple geographies.
Follows an asset light business model resulting in higher return on capital.
Capacity addition to cater to domestic & international markets completed.
Approach of "solutions for farmers" rather than manufacturing/selling to farmers .
Substantial scope for financial performance improvement once capacity utilization increases.
Tie ups with global players for R&D gives the company access to new specialty products.
Common Characteristics of good Small cap stocks.
• Attractively valued
• Niche Players.
• Good business models.
• Scope for rapid growth in business.
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Stocks/sectors referred above are illustrative and are not recommended by HDFC Mutual Fund/AMC. The Fund may or may not have any present or future positions in these stocks.
Finding the next opportunities/niche companies.
A Fast Growing NBFC A Leading Auto Ancillary Manufacturer
Well diversified NBFC focused on urban customers
Market leader in specific automotive components.
Significant improvements in operations management through effective technology usage.
Company has a high ROCE and free cash flow generating capability. The company has a low debt/equity ratio.
Developed new business lines to diversify loan book and expand domestic footprint.
Long standing relationships with OEM`s and a strong distribution network across the domestic market as well as rising export opportunities.
Expected to grow while maintaining good profitability.
Strong engineering skills and stable management.
Common Characteristics of good midcap stocks.
• High quality.
• Market Leaders.
• Good Growth Prospects.
• High Return ratios.
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Stocks/sectors referred above are illustrative and are not recommended by HDFC Mutual Fund/AMC. The Fund may or may not have any present or future positions in these stocks.
India : Probably the best placed economy in the world
• Best demographics
• Very low penetration of consumer durables.
• Major beneficiary of oil fall
• Deflation not a concern
• One of the few with peak rates
Source: Kotak, Bloomberg, JP Morgan, UN Comtrade, World Economic Outlook, PPAC, Interest rate is 10 Year GSec as on 29th Jan, 2015
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Equity Markets : A Positive Outlook
• India is amongst a handful of large economies with a downward outlook on interest rates, stable political situation and benefits of lower commodity prices.
• Expectations of lower Interest Rates & strong earnings growth to provide impetus to equity markets.
• Current P/E multiples of equity markets are reasonable – neither expensive, nor cheap.
• Room for multiples to expand as expectations of growth improve.
• Merit in increasing allocation to equities (for those with a medium to long term view) in a phased manner and stay invested.
Reasonable P/E’s at cyclically low margins leads to positive outlook for equities
Reference made to S&P BSE SENSEX in this presentation is only for easy understanding of market movement and must not be construed as future performance of S&P BSE SENSEX. Refer Disclaimer / Risk Factors on Slide 18
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Roll PE (LHS)
average (LHS)
BSE (RHS)
Source : CLSA
EBITDA margins at cyclical lows Reasonable P/E’s despite markets run up
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Source : BAML
FY
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Equity Markets : A Positive Outlook
Presenting HDFC Small & Midcap Fund
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Investment Philosophy Growth Investing – Growth at a reasonable price
• Combination of attractive growth and reasonable valuations.
• Metric based investing looking at industry & company specific pointers.
• Involves higher risk and higher returns.
• Focus on well managed small & midcap companies operating in a niche environment and those that are relatively at an early stage in their life-cycle.
• Investments are made in companies valued lower than their intrinsic worth with the hope of growth in intrinsic value and a narrowing of the gap to intrinsic value.
• Investments are typically made in growth companies with expanding businesses and profitability.
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HDFC Small & Midcap Fund – A Small & Mid Cap Focused Investment Strategy
Time
MATURITY
DECLINE
Focus on Small and Mid Caps here
Time
MATURITY
DECLINE
Growth
Focus on Small and Mid Caps here
GROWTH
INCEPTION
Superior Growth to be driven by
• Presence in generally new & faster growing segments
• Ability to gain share due to new technology, better products / services etc.
• Small base and niche presence
For further details on investment strategy refer Scheme Information Document/Key Information Memorandum
Small Cap Mid Caps Large Caps
Research Available Low Mid High
Institutional Ownership Low Mid High
The Fund invests in a mix of Small (50-75%) and Midcap companies (25-50%)
The Fund targets less discovered, high quality small and midcap companies that are growing well and available at reasonable valuations
To identify less discovered companies
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HDFC Small & Midcap Fund – Current Investment Strategy
Focus on creating a portfolio on a bottom up basis. Sector allocation: currently overweight Banks, Pharma, Auto and Industrial. Fund maintains a diversified portfolio of 50-60 companies.
The current investment strategy is subject to change depending on the market conditions
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Risk Mitigants
Management risk is high Focus on competent and quality management
Access to funds is limited Focus on companies with strong balance sheets
Business quality Focus on companies with a strong business focus and niche businesses models
Suitable for specific market phases Maintain a diversified portfolio
Taking the SIP Route – Slow & Easy
• Imbibes financial discipline.
• Drops of water help fill a glass – Small and regular investments build a corpus over time.
• Eliminates the need to time the markets.
• Enables setup and plan financial goals.
• Option to stop at anytime thus providing flexibility.
• Aids in long term wealth creation.
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Why SIP ? Why an SIP in HDFC Small & Midcap ?
• An open ended Fund with a well defined
portfolio strategy.
• Targeted allocation to small and midcap stocks
with good growth and earnings potential.
• While the Fund offers a good risk reward
proposition in the medium to long term, short
term volatility is high.
Disclaimer: SIP does not assure a profit or guarantee protection against a loss in a declining market. HDFC Asset Management Company Limited/ HDFC Mutual Fund/ are not liable for any financial decisions arising out of the use of this calculator and also they do not take the responsibility, liability, for any error or omission or inaccuracy or for any losses suffered nor undertake the authenticity of the figures calculated on the basis of calculator. The user before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall along liable for any decision taken on the basis of information contained herein. In view of individual nature of tax consequences each investor is advised to consult his/her own professional tax advisor.
SCHEME PERFORMANCE – HDFC Small & Midcap Fund
Past performance may or may not be sustained in the future. Returns greater than 1 year period are compounded annualised (CAGR). The above
returns are of growth option. $ Adjusted for bonus units declared under the scheme # The Scheme is co-managed by Chirag Setalvad and Miten Lathia. +The Scheme is co-managed by Chirag Setalvad (Equities) and Anil Bamboli (Debt). @Scheme performance may not strictly be comparable with that of its Additional Benchmark in view of balanced nature of the scheme where a portion of scheme's investments are made in debt instruments. ^Scheme performance may not strictly be comparable with that of its Additional Benchmark in view of hybrid nature of the scheme where a portion of scheme's investments are made in equity instruments. @@ Open Ended Equity Linked Savings Scheme with a lock-in period of 3 years. Load is not taken into consideration for computation of performance. # * Erstwhile Morgan Stanley A.C.E. Fund. Fund taken over at the end of business hours on June 27, 2014 1. Benchmark 2. Additional Benchmark . NAV at Inception for all the above schemes was Rs 10.
31 Dec 2013 to
31 Dec 2014
31 Dec 2012 to
30 Dec 2014
31 Dec-2011 to
31 Dec 2014
Since Inception
CAGR (in %)
HDFC Small and Mid Cap Fund# * 25.6550 51.48 27.62 28.86 14.98 25,655
CNX Smallcap Index1 54.95 19.21 24.76 5.43 14,288
CNX Nifty Index2 31.39 18.43 21.40 8.52 17,358
HDFC Mid- Cap Opportunities Fund 36.093 76.63 39.16 39.23 18.60 36,096
CNX Midcap Index1 55.91 21.64 27.16 10.78 21,595
CNX Nifty Index2 31.39 18.43 21.40 9.24 19,446
HDFC Capital Builder Fund# 195.844 51.95 29.50 29.08 15.28 195,844
CNX 500 Index1 37.82 19.50 23.43 9.25 63,733
CNX Nifty Index231.39 18.43 21.40 9.54 67,343
HDFC Long Term Advantage Fund @@ 235.667 44.68 26.71 27.35 25.31 235,667
S&P BSE SENSEX 1 29.89 18.98 21.13 14.72 68,426
CNX Nifty Index2 31.39 18.43 21.40 14.32 65,126
HDFC Balanced Fund @ 105.304 51.47 28.36 27.70 17.88 105,304
CRISIL Balanced Fund Index1 25.34 15.29 17.22 NA N.A.
CNX Nifty Index2 31.39 18.43 21.40 12.91 56,873
HDFC Children's Gift Fund - Investment Plan $ @ 81.757 43.10 27.14 27.15 18.62 106,284
CRISIL Balanced Fund Index1 25.34 15.29 17.22 NA N.A.
CNX Nifty Index2 31.39 18.43 21.40 14.28 63,403
HDFC Children's Gift Fund - Savings Plan $ ^ 34.724 24.68 14.71 13.97 11.50 45,141
CRISIL MIP Blended Index1 16.83 10.45 10.98 N.A. N.A.
CRISIL 10 Year Gilt Index2 14.14 6.47 7.84 N.A. N.A.
HDFC Multiple Yield Fund- Plan 2005 +^ 24.537 20.43 13.33 12.81 10.04 24,537
CRISIL MIP Blended Index1 16.83 10.45 10.98 8.28 21,089
CRISIL 1 Year T - Bill Index2 8.56 7.20 7.49 5.89 17,100
Scheme
Discrete Returns in % Value of investment of
Rs. 10,000 Since
Inception (Rs.)
Other Funds Managed by Chirag Setalvad, Fund Manager of HDFC Small and Mid Cap Fund
NAV as
on 31 Dec
2014
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Product Features – HDFC Small and Mid Cap Fund
Refer Disclaimer / Risk Factors on Slide 18
Type of Scheme Open-ended Equity Scheme
Inception Date (Date of allotment)
April 3, 2008
Investment Objective To provide long-term capital appreciation by investing predominantly in Small-Cap and Mid-Cap companies
Fund Manager $ Mr. Chirag Setalvad
Plans HDFC Small and Mid Cap Fund – Direct Plan, HDFC Small and Mid Cap Fund – Regular Plan
Options Under Each Plan: Growth & Dividend. The Dividend Option offers Dividend Payout and Reinvestment facility.
Minimum Application Amount
(Under Each Plan/Option)
Purchase: Rs 5,000 and any amount thereafter
Additional Purchase: Rs 1,000 and any amount thereafter
Load Structure Entry Load: Not Applicable. Upfront commission shall be paid directly by the investor to the ARN Holder (AMFI registered Distributor) based on the investors’ assessment of various factors including the service rendered by the ARN Holder.
Exit Load:
In respect of each purchase / switch-in of units, an exit load of 2.00% is payable if units are redeemed / switched-out within 12 months from the date of allotment.
In respect of each purchase / switch-in of Units, an Exit Load of 1.00% is payable if Units are redeemed / switched-out after 12 months but within 24 months from the date of allotment.
In respect of each purchase / switch-in of Units, an Exit Load of 0.50% is payable if Units are redeemed / switched-out after 24 months but within 36 months from the date of allotment.
No Exit Load is payable if Units are redeemed / switched-out after 36months from the date of allotment.
Benchmark Index CNX Smallcap Index
$ Fund Manager Overseas investment –Rakesh Vyas For further details, refer SID and KIM available on www.hdfcfund.com and at Investor Service Centres of HDFC Mutual Fund
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Under normal circumstances, the asset allocation of the scheme’s portfolio will be as follows:
Asset Allocation Pattern
*Investment in Securitised debt, if undertaken, would not exceed 20% of the net assets of the Scheme. The scheme may seek investment opportunity in the ADR / GDR / Foreign Securities (max. 30% of net assets) & Foreign Securities (max 20% of net assets) subject to SEBI (Mutual Funds) Regulations, 1996. The scheme may use derivatives (max 50% of net assets). Refer Disclaimer / Risk Factors on Slide 18.
Type of Instruments Minimum Allocation (% of Net Assets)
Maximum Allocation
(% of Net Assets)
Risk Profile of the Instrument
Equity and equity related instruments of Small and Mid-Cap companies of which • Small-Cap companies • Mid-Cap companies
75 50 25
100 75 50
High
Equity and Equity related instruments other than the above
0 25 Medium to High
Debt and Money Market Securities (Including securitized debt*)
0 25 Low to Medium
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Glossary
ROCE – Return On Capital Employed
OEM – Original Equipment Manufacturers
R&D – Research & Development
PPAC – Petroleum Planning and Analysis Cell
G Sec – Government Securities
Smallcap – Companies whose market cap is equal to or lower than that of the stock with the largest market cap in the CNX Smallcap Index.
Midcap – Companies having a market capitalization equal to or lower than that of the stock with the largest market cap in the CNX Midcap Index.
P/E – Price to Earnings
EBIDTA – Earnings before interest depreciation taxes and amortization
CPI – Consumer Price Inflation
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DISCLAIMER / RISK FACTORS
The views expressed herein are based on the basis of internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only and is not an offer to sell or a solicitation to buy/sell any mutual fund units/securities. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information/ data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The same should not be construed as investment advice to any party. The statements contained herein are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Neither HDFC Asset Management Company (HDFC AMC) and HDFC Mutual Fund (the Fund) nor any person connected with them, accepts any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein. MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
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Thank You