HDFC Small Cap Fund (An open ended equity scheme predominantly investing in small cap stocks) Small is Powerful! Riskometer June2019 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 • Fund History and Investment Approach • Small Cap Universe • Why Small Caps? • Are Small Caps very risky? • Correction of excesses in small cap segment • Portfolio Construct • Scheme Sectoral Allocation • Portfolio Turnover • Portfolio Concentration • Scheme Performance • Disclaimer & Risk Factors 2
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 3
Small Cap Universe Parameters Details Small-Cap Universe Companies beyond 250th company in terms of full market capitalization Below Rs 8,590 Cr Large Above Rs Market Cap Range (As of 31 st Dec’ 18) caps – 100 27,944 Cr Companies Allocation to Small-Cap 65%-100% Stocks Rs 27,944 Cr Mid caps Classification as per SEBI to Rs 8,590 Cr circular on rationalization 150 Companies and merger of schemes.* Below Rs Large Universe provides more opportunities 8,590 Cr for alpha generation. Source: Classification as per SEBI circular (SEBI / HO/ IMD/ DF3/ CIR/ P/ 2017/ 114) dated October 6, 2017, the universe of “Small Cap” shall consist of companies below 250 th company in terms of full market capitalization. *AMFI - As on 31 st December 2018. Stock cut off – Market Cap above Rs 150 Cr 4
Why Small Caps Scope for PE Expansion • 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 are 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 Index Group Institutional Retail NIFTY 50 Index 39 NIFTY 50 Index 42 41 16 NIFTY Midcap 100 Index 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 Research, Company Reports Average analyst coverage is the average number of analysts covering each of the index constituents as on May 31 st 2019. Ownership pattern as disclosed by index constituent companies to the NSE as on QE March 2019 5
Are Small Caps very risky? …..Not really Is risk higher? • A common perception is that small caps are riskier • Volatility exhibited by the Small Cap benchmark is in line with large and midcaps. (See charts below) • Numbers say otherwise Small caps are equally volatile as Large / Mid caps Annualized Volatility 25% 24% 22% 22% 20% 15% 10% 5% NIFTY Small Cap NIFTY Mid Cap NIFTY 50 TRI 100 TRI 100 TRI Source: HDFC AMC Research, Bloomberg Calculations done from 1 st April 2005 (NIFTY Full Mid cap 100 Index and NIFTY Full Small Cap Index– Base date) for all indices for the purpose of consistency of data. All calculations as of May 31 st 2019. Annualized volatility calculated based on day wise changes in index values of mentioned indices. Past performance may not be sustained in the future. Historical performance indications and financial market scenarios are not reliable indicator 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. 6
Correction of excesses in Small Cap segment Returns 1 Year 1400 NIFTY 50 TRI 12.43% NIFTY Small Cap 100 TRI -15.50% 1200 Absolute and relative valuations of small caps have moderated 1000 800 600 400 200 0 NIFTY 50 TRI NIFTY Small Cap 100 TRI Source: HDFC AMC Research, Bloomberg All calculations as of May 31 st 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 indicator 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
Portfolio Construct • Invests at least 65% in small-cap companies. • Targets high quality small cap business which are undervalued and have a sustainable business. • Well diversified portfolio at all times. Market Cap * ( In Rs. Crore) Weighted Average Market Cap ** (in Rs Crore) 60 9,000 53 8,089 8,000 50 % of Portfolio 44 43 7,000 40 5,847 6,000 31 30 26 5,000 20 4,000 3,000 10 4 2,000 0 Less than Rs 5000 Rs 5,000 Crore to Rs More than Rs 10,000 1,000 Crore 10,000 Crore Crore - HDFC Small Cap Fund Benchmark HDFC Small Cap Fund Benchmark Portfolio as on 31 st May 2019. * Full Market Cap data as on May 31, 2019 from Capital Line. Equity Exposure of Fund rebased to 100%. HDFC Mutual Fund/AMC is not guaranteeing returns on investments made in this scheme. ** Weighted Average Market Cap as on May 31, 2019 (Source: Capital Line). The current investment strategy is subject to change depending on the market conditions 8
Scheme Sector-wise Allocation 25 Alpha generation by maintaining portfolio differentiated 21 from the benchmark 20 % of Total Assets Scheme Benchmark 14 15 13 13 12 9 9 9 10 7 7 7 6 5 5 5 4 4 4 5 4 4 3 3 3 2 2 2 2 2 2 0 0 Metals Financial Services Industrial Manufacturing IT Services Construction Automobile Fertilisers & Pesticides Chemicals Media & Entertainment Pharma Consumer Goods Energy Textiles Cement & Cement Products Note : Top 10 Industries in the portfolio. Source:-Bloomberg (Sector classification as per IISL). As of 31 st May 2019.For detailed portfolio refer wwww.hdfcfund.com. 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. 9
Differentiated portfolio Top 5 Overweight/ (Underweight) Sectors 10.0 7.4 8.0 6.2 % of Total Assets 6.0 4.9 4.0 2.3 1.1 2.0 - (2.0) (4.0) -3.2 -3.5 (6.0) -5.7 -5.8 (8.0) -7.0 I ndustrial Manufacturing Services Automobile Fertilisers & Pesticides Media & Entertainment Energy I T Consumer Goods Construction Financial Services Source:-Bloomberg (Sector classification as per IISL). As of 31 st May 2019.For detailed portfolio refer www.hdfcfund.com. 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. 10
Consistently Low Portfolio Turnover Ratio - High Portfolio Conviction 100 90 80 Portfolio Turnover Ratio % Consistently Low Portfolio Turnover Ratio indicating high conviction in 70 stock picking and long term approach to investing. 60 50 40 30 21 20 10 4 - May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Portfolio Turnover Ratio Average Source:-ICRA online .As of 31 st May 2019. 11
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