HDFC Small Cap Fund (An open ended equity scheme predominantly investing in small cap stocks) Small is Powerful! Riskometer October 2019 This product is suitable for investors who are seeking*: • To generate long-term capital appreciation /income. Investments predominantly in Small-Cap companies . • *Investors should consult their financial advisers if in doubt about whether the product is suitable for them. 1
Table of Contents Small Cap Universe • Why Small Caps? • Sector-wise presence – Large Cap vs Small Caps • Correction of excesses in small cap segment • Correction in small caps : Right time to invest ? • Long Term approach to small cap investing • Scope for bottom-up stock picking • HDFC Small Cap Fund – Fund History, Portfolio Construct, Sector-Wise allocation, Portfolio • Turnover, Portfolio Diversification, Portfolio Statistics Scheme Performance • Disclaimer & Risk Factors • 2
Small Caps 3
Small Cap Universe Parameters Details Small-Cap Universe Companies beyond 250th company in terms of full market capitalization Rs 8,801 Cr and below Large Rs 28,920 Cr Market Cap Range (As of 30 th June 2019) caps – 100 and above Companies Allocation to Small- 65%-100% Cap Stocks Rs 27,454 Cr to Mid caps Classification as per SEBI Rs 8,858 Cr circular on 150 Companies rationalization and merger of schemes.* Rs 8,801 Cr Large Universe provides more and below opportunities for alpha generation. Source: Classification as per SEBI circular (SEBI / HO/ IMD/ DF3/ CIR/ P/ 2017/ 114) dated October 6, 2017, wherein the universe of “Small Cap” shall consist of companies below 250 th company in terms of full market capitalization. *AMFI - As on 30 th June 2019. Stock cut off – Market Cap above Rs 150 Cr. 1204 small cap companies mentioned above are those small cap companies with market cap>Rs 150 Cr. 4
Why Small Caps? Scope for returns Size of the company increases • Analysts start tracking stocks • Institutional holding increases • Better disclosure levels can lead to greater familiarity and high multiples • As a result, smaller stocks which can be mis-priced get re-priced • Under Researched: Limited Analyst Coverage Under Owned: Lower Institutional Holding Average Analyst Ownership Pattern amongst Index Constituents (%) Index Cove rage Promoter NIFTY 50 Index 38 Index Institutional Retail Group NIFTY Midcap 100 Index 16 NIFTY 50 Index 42 41 16 NIFTY Small Cap 100 Index 8 NIFTY Midcap 100 Index 55 28 17 NIFTY Small Cap 100 Index 50 24 26 For small cap stocks, company specific factors have a much higher impact than macro factors Source: Bloomberg, HDFC AMC Internal Research, Company Reports Average analyst coverage is the average number of analysts covering each of the index constituents as on September 30 th 2019. Ownership pattern as disclosed by index constituent companies to the NSE as on QE June 2019 5
Sector-Wise Presence – Large Caps vs Small Caps Small Caps^ provides investment opportunities in segments of the economy which are not covered by Large Caps*. Key Statistics NIFTY 50 NIFTY Small Cap 100 35 Number of Industries 21 28 30 Top 5 Industries (%) 76 45 NIFTY 50 : High % Weight in Index 25 Concentration in Top 10 Industries (%) 91 67 some industries 20 Industries covered by NIFTY 50 NIFTY Small Cap 100 15 NIFTY Small Cap 100 but not part of NIFTY 10 50 5 - HOTELS, RESORTS AND… TELECOM - EQUIPMENT &… BANKS SOFTWARE CONSUMER NON DURABLES PETROLEUM PRODUCTS FINANCE POWER PHARMACEUTICALS TELECOM - SERVICES NON - FERROUS METALS CONSUMER DURABLES FERROUS METALS MINERALS/MINING PESTICIDES GAS AUTO ANCILLARIES CHEMICALS FERTILISERS HEALTHCARE SERVICES INDUSTRIAL CAPITAL GOODS INDUSTRIAL PRODUCTS RETAILING TEXTILE PRODUCTS TRADING AUTO CONSTRUCTION PROJECT CEMENT OIL TRANSPORTATION MEDIA & ENTERTAINMENT CONSTRUCTION Data is As of 30 th September 2019 Source : MFI Explorer . Sector classification as per AMFI. Classification as per SEBI circular (SEBI / HO/ IMD/ DF3/ CIR/ P/ 2017/ 114) dated October 6, 2017. The universe of “Large Cap” shall consist of companies up to 100 th company in terms of full market capitalization. The universe of “Small Cap” shall consist of companies below 250 th company in terms of full market capitalization. * As represented by NIFTY 50 Index, ^ As represented by NIFTY Small Cap 100 Index 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/sectors. The above statements / analysis should not be construed as an investment advice or a research report or a recommendation to buy or sell any security covered under the respective sector/s .The same has been prepared on the basis of information, which is already available in publicly accessible media. 6
Correction of excesses in Small Cap segment 1400 NIFTY 50 TRI NIFTY Small Cap 100 TRI I ndex Values (Rebased to 1 st Jan 2004) 1200 1000 800 600 400 200 0 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Source: HDFC AMC Internal Research, Bloomberg. All calculations as of September 30 th 2019. Index Values rebased to 1 st January 2004 which is the inception date of the NIFTY Small cap 100 index. Historical performance indications and financial market scenarios are not reliable indicators for current or future performance. Small Caps carry a higher risk of market fluctuations and are also prone to higher liquidity risks. Small caps are strictly not comparable to Large caps stocks. 7
Correction in Small Caps: Right time to invest? NIFTY Small Cap 100 TRI Index witnessed 1 Year loss exceeding 10% in 589 instances since inception*. However, 3 Year CAGR from such days was always positive with returns greater than 15% p.a. in ~ 68% instances NIFTY Small Cap 100 TRI: 3 Year CAGR after 1 Year loss exceeding 10% Annualized Number of % of Returns I nstances I nstances > 0 % 589 100% > = 10% 431 73% > = 15% 400 68% > = 20% 317 48% * Data up to 30 th September 2019. The above simulation is for illustration only. Past performance may or may not be sustained in the future. Mutual Fund/AMC is not guaranteeing returns on investments made in this scheme. 8
Long term approach to investing in small caps As investment horizon increases, variability of returns reduces significantly. Long term approach to investing in small caps reduces volatility of returns. NIFTY Small Cap 100 TRI: Daily Rolling Returns Range 200 Maximum Minimum 166 150 100 72 CAGR (% ) 50 32 23 6 - -7 -17 (50) -72 (100) 1 Year 3 Years 5 Years 10 Years Source : MFI Explorer, Daily Rolling returns from inception of NIFTY Small Cap 100 TRI (1 st Jan 2004) to 30 th September 2019 Past Performance may not be sustained in future. Returns greater than 1 year period are compounded annualized (CAGR). Mutual Fund/AMC is not guaranteeing returns on investments made in any scheme. 9
Scope for Bottom up stock picking Return range of NIFTY 500 Companies for the 5 year period from 31 st March 2014 to 31 st March 2019 Returns of NIFTY 500 companies Top 100 101-250 251-500 >10x 0 1 6 5x-10x 1 9 26 3x-5x 15 27 35 2x-3x 15 31 38 50%-100% (2x) 28 16 28 Between 0 and 50 % 20 25 26 Between 0 and -20% 8 6 7 Between -20% and-50% 4 14 10 Less than -50% 5 17 43 NA * 4 4 31 Wide dispersion of returns in small caps provides better scope for bottom-up stock picking Source : Bloomberg. Classification as per SEBI circular (SEBI / HO/ IMD/ DF3/ CIR/ P/ 2017/ 114) dated October 6, 2017. The universe of “Large Cap” shall consist of companies up to 100 th company in terms of full market capitalization. The universe of “Small Cap” shall consist of companies below 250 th company in terms of full market capitalization. Absolute Returns from 31 st March 2014 to 31 st March 2019 considered for NIFTY 500 Constituents as of 31 st March 2014 * Includes companies which delisted, merged, liquidated during the period. Past performance may not be sustained in the future. Historical performance indications and financial market scenarios are not reliable indicator of current or future performance. 10
HDFC Small Cap Fund 11
Fund History and Investment Approach • Launched as Morgan Stanley A.C.E. Fund on April 3, 2008 as a multi-cap fund. • Scheme acquired by HDFC Mutual Fund in 2014* and fund repositioned as Fund History HDFC Small & Mid-cap Fund with a focus on small and midcap stocks. • Scheme repositioned** in November 2016 and renamed as HDFC Small Cap Fund, with a focus on Small cap stocks. • Focus on well managed small cap companies. Investment Approach • Focus on quality metrics like ROCE & ROE, Cash flows • Invest predominantly in small cap companies. • Identifying companies with reasonable growth prospects. Investment Strategy • Identify companies with sound financial strength and sustainable business. • Seek undervalued businesses. *Scheme acquisition as on close of business hours on June 27 th 2014. ** W.e.f. November 9 th 2016 The current investment strategy is subject to change depending on the market conditions. Read Scheme Information Document for more details. 12
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