The rise and fall of HDFC Top 100

HDFC Top 100 was the largest fund in its category for a long time (and is still among the top 5 in its category in AUM). It has shown great mettle in its comeback stories time and again.  

Today, for us, it serves a different purpose. HDFC Top 100 is a great candidate for a serious case study on the changing performance of mutual funds in India and what it means to you. A large asset size, that speaks of the amount of participation by retail investors in this fund, a long-enough track record (among the oldest funds) to watch performance over evolving markets and cycles and of course its meteoric rise in the performance chart and the struggles now , makes it an apt case for analysis and understanding.

HDFC Top 100

This article is not a review of HDFC Top 200 (you can use our MF Review Tool for our calls on funds).  Rather, it is meant to throw light on the history of this fund and large-cap funds in general,  so that it can teach some object lessons for investors on why portfolio maintenance is important.

The meteoric rise

HDFC Top 200, as it was earlier called, was always an aggressive large-cap-plus fund โ€“ taking some exposure outside of pure large-caps to generate alpha. Backed by a supremely skilled fund manager, Prashant Jain, the fund has these characteristics:

  • A value-conscious approach to investing, exiting where valuation became uncomfortable
  • Not compromising on valuations and often staying underweight on sectors such as FMCG or IT when they commanded premium valuations.
  • Not wanting to take momentum picks or sectors that are new to the listed space or those that ask for valuations not backed by quality balance sheets or growth potential. Staying away from IT in the run-up to Y2K, or realty and infrastructure in the run-up to the 2008 fall are examples.
  • High-conviction bets and sticking to its guns even in the face of underperformance
  • Straying away from index stock and sector weights to seek alpha

 The above worked in the fundโ€™s favour for a long period of time. And the alpha was not a meagre 1-2 percentage points that you see in funds these days. As this simple calendar year returns graph will show you, the bellwether index was no match for active funds and HDFC Top 200 was among those that breezed past their benchmarks effortlessly.

The fund had its rainy days. It could not keep pace with its peers when the infrastructure, real estate boom was at its peak as the fund stayed away from this space. But the strategy paid off as 2008 saw it falling less than index and peers, less hurt by avoiding risky bets that others had taken.

But again, its favourite cyclical bets failed to pay off in 2015 but 2016 saw them delivering. In other words, its calls โ€“ both cautious ones and aggressive ones, worked with a lag. And that is not totally unexpected in a value-conscious fund.

This grand show has kept HDFC Top 100โ€™s since inception record intact. That means if you were one of the early investors in this fund, you will have found little reason to complain and more importantly, unlikely to have been conscious of the fundโ€™s underperformance in recent years.

But even as the fund bounced back every time, the stock market field had changed for good by 2010. And by 2012, while the fund was still among the top contenders, the margin of outperformance was dwindling. By 2015, when the markets started re-adjusting to newer ways of delivering, HDFC Top 100, along with many large-cap funds, started losing its dominance.

The struggle and reasons

When a fund has high conviction bets on which it goes overweight and the same does not deliver, the pain can linger for long. And when the fundamentals of the market changes, it compounds the problem. Result โ€“ the gap between the fund and the benchmark widened, making it a lot more difficult to catch up. The data below gives the outperformance (or underperformance) of the fund over its current benchmark โ€“ the Nifty 100 TRI on a rolling 3-year return basis.

This rolling 10-year chart below will give you a better indication of how its glorious past could hold the fund for a good while, but not long enough as it slipped into underperformance even over 10-year periods. Since November 2019, the fund has steadily lagged the index on a rolling 10-year return.

At present, the fund lags the category in terms of not just consistency, but also fares poorly on standard deviation, downside capture, and also alpha compared with more stable peers that came into the scene in the past decade or decade and half. Of course, in this exercise, we weigh active large-cap funds along with index funds to see how they fare. This comparison has become necessary as largecap as a category has been faring poorly and the minimum expected of an active fund would be to beat the index.

Structural changes in market returns

HDFC Top 100 is not alone in its underperformance of benchmark in recent years. The following events that took place changed the large-cap investing landscape.

  •  The flight to quality that took place post 2010 could never really be meaningfully reversed as Corporate India witnessed many key events โ€“ from demonetization, change in banking regulations and real estate regulations besides inertia for any kind of capex build up. This led to polarized valuations in the market. Funds that rode high valuations without fear were rewarded while those that did not believe in paying for such premium lost out.
  • The rally phase for cyclicals have increasingly become shorter. Rallies in banks and PSUs or in auto and capital goods are unable to sustain in the absence of meaningful expansion in key sectors in the economy. Funds like HDFC Top 100, that take bets based on mispriced valuations and hope for a turnaround were not rewarded for their patience.
  • The above two resulted in a market chasing very few stocks such that market-cap based index investing was the only way to ensure you stayed with the market returns.
  • Active funds that took concentrated weights in the top index stocks were the ones that outperformed. While HDFC Top 100 was known to take concentrated bets, early on, it was outdone by peers like Axis Bluechip. The later currently has a 64% weight to its top 10 stocks as opposed to 53% by HDFC Top 100.
  • Money pouring into passive investing, through various channels, including pension money, also provided impetus to index stocks and the index themselves.

Changes in industry

If the above is a gist of the structural shift in the markets and corporate fundamentals, the MF industry, too, saw some shifts.

  • Regulatory shift that required funds to compare their performance with the total returns index (returns of index including dividends reinvested) meant that funds were suddenly staring at underperformance. The already slim margin of outperformance slipped to negative grounds when the TRI became the mainstay index. (separately, remember, even in the early years of outperformance, the NAV return never considered the entry load that you paid upfront until 2009).
  • The onset of direct plans from 2013 not only meant that the industry had to become cost conscious but also had to contend with low-cost index products. A decade ago, the number of index funds were a handful. Now the number competes with large-cap funds. With a thin outperformance or significant underperformance of index, large-cap funds were unable to compete with low-cost passive funds that rode the lopsided market cap wave.
  • When SEBIโ€™s new categories came in, they posed 2 challenges to funds: they had to fit themselves into those categories thus giving up their freedom to navigate across market cap. HDFC Top 100 for instance, had become a pure play large cap (renaming itself as HDFC Top 100 from Top 200), thus losing the leeway it earlier had.

Not embracing change

Sometimes not embracing changes can prove to be costly. Apart from the market and industry changes, HDFC Top 100 had its own slips.

At a time when the industry  and investors are becoming cost conscious and outperformance margins are thinning, cost is one key lever to improve returns. In this HDFC Top 100 could have done better.

Despite being the fifth largest in the large-cap category now in terms of AUM, it ranks 17 (out of 28 funds) in terms of lowest expense ratio under the direct plan. As of July 31, 2020, the TER of the direct plan of HDFC Top 100 stood at 1.28%. While it has indeed come down over the years, similar peers in terms of AUM have positioned themselves with far lower expense ratio. For example, Mirae Asset Largecap had an attractive 0.62% under the direct plan while it was 0.43% for Axis Bluechip; the latter having a marginally lower AUM than HDFC Top 100.

The other strategy-level call is a limitation in not calling off a bet that didn’t work and moving to where markets went. When the structural changes in markets bring about permanent change in the fortunes of a portfolio, a re-look may become inevitable.

For example, while banking and finance is a large bet in many a fundโ€™s portfolio, HDFC Top 100 was caught on the wrong foot twice. One, it took bet on PSU banks when the retail banking boom started. This resulted in missing a roaring opportunity for a good part. When this passed, the increased NPA issues with public sector banks posed a greater challenge of not knowing when the clean up would be complete. Similarly, lack of spends and lack of visibility with PSU companies meant that their โ€˜valueโ€™ didnโ€™t turn to growth at all. Funds that simply moved to โ€˜qualityโ€™ paying a premium to avoid this uncertainty, saw themselves doing well.

The above narration is, for a good part, true of many a large-cap fund. We have also written about such shifts in other funds here: https://www.primeinvestor.in/why-were-avoiding-some-of-the-iconic-large-cap-funds/

The lessons for investors

There are many learnings from the robust record of a fund like HDFC Top 100.

  • There is no such thing as buy and hold. There is only โ€˜staying invested in equitiesโ€™. The product you choose to stay with, will change with times and market conditions.
  • Even the best of funds can slip and others will take over. When the underperformance is pronounced, it is better not to be in denial (because the fund has delivered well for you in the past) and instead move on with what suits you in the changed market scenario. If an index fund works better, no reason not to shift.
  • When the margin of outperformance thins, cost becomes a key metric to look for. To this extent, one cannot be oblivious to cost across equity categories, although cost does play a lesser role in equity than in debt.
  • You can appreciate funds sticking to their conviction but at the same time, not going overboard with allocation to star performers will ensure your portfolio does not suffer if the conviction does not pay off.
  • Instead, having a mix of styles will help counter such underperformance in styles and strategies.

When you check our review tool, many of you ask us why we have a negative call on funds that have returned well for you. It is this:

Long holding periods provide you the cushion of not being hit by a fundโ€™s recent underperformance. A fund would have delivered well for you and you may not see any reason to exit. But the cushion will eventually with time and the underperformance will show up in your portfolio. The 10-year outperformance margin graph earlier in this article shows you that.

The below graph of 10-year SIP (of Rs 5000 per month over 10 years) ending August 2020 also tells you how the wait can result in opportunity losses that you may not be aware of:

Knowing history and the changes through the years will help you not to place blind expectations on returns in general and also excessive reliance on star funds. Otherwise, you may simply take excessiveย comfort from the glorious history of Indian funds and be disappointed.

More like this

41 thoughts on “The rise and fall of HDFC Top 100”

  1. Hi Vidya,
    The article is a result of out of box thinking. Thank you. I’m glad and lucky I’m a member.
    One issue that all MF investors have to now go through is the long term capital gains tax which makes it expensive to make a switch to a new fund. Due to under performance of a fund, one is forced to redeem and move to another fund. This results in not only capital gains tax but also if one were to redeem from the new fund as we ll in the future he will end up paying at least another 10% . This means that once you choose a fund, you keep praying your fund does well in the years to come!! And this becomes a new normal to live with.

    Thanks,
    Sreenath.

    1. Hello Sir, Thank you for the kind words. On tax, I think 10% is a small sum considering (many of us don’t even remember) the period before capital gains exemption in India (where even equity as taxed). There is still inflation beating returns to be had post tax in equities. thanks, Vidya

      1. And there is tax only if there is a gain. i’d be happy paying tax then to not have gains…HDFC Top 100 has been a pain and have decided to switch to index instead.

  2. Mam, nice article. Thank you.
    Last graph wherein itโ€™s indicated opportunity loss, also indicates one more learning.
    A common man with an index fund would have bet many star managers ! Isnโ€™t it?

  3. A very comprehensive story on the structural and regulatory changes that occurred in the market and MF industry in the last one decade and how they negatively impacted a bellwether fund that had not changed its strategy and style. Analysis of HDFC Top 100 Fund is incisive and the takeaway for investors are beautifully articulated.

    Congratulations!

    1. Thank you sir. Well articulated. Adaptability is also important. Funds that do not, may fall by the wayside. thanks, Vidya

  4. Excellent analysis and very thought provoking. It was a master class session. You are the best mutual fund analyst in the country today. Please publish similar articles on HDFC EQUITY , HDFC CAPITAL BUILDER ,

  5. Dear Madam,
    Was the fall of this Fund related to any change in Fund Manager changes?
    If Primeinvestor can do review articles on the performance of Fund managers over time (whatever fund they may be managing), I feel that would be an innovative thing and would be eye opener. Actually the investor is giving the money to the fund manager and not the fund. Many a times we have to get attached to the doctor and not the hospital. If the doctor, we have belief in, moves to another hospital, we should move with him/her rather than sticking to the hospital. A bad doctor can ruin a good hospital and a good doctor can make even a small hospital shine.

    Would like to have your opinion on this matter.

    Regards
    Kishan

    1. No.The fund manager has been the same right through. Unlike doctors where skill (and empathy if I may add) is highly personalised, Fund management process can be largely (not fully) process driven. That is one of the qualitative aspect we look at – whether it is process driven and whether it aligns with the overall fud objective and not simply fund manager driven.
      Also – it is nto easy to entirely attribute a fund failure to a fund manage change. It is like PSU banks. Sometimes, the successor has to face the song for mistakes of the predecessor ๐Ÿ™‚ We simply prefer to alert poor performance and move on. thanks, Vidya

  6. Good analysis, key take away for investors is to keep reviewing performance at regular intervals and not to place blind faith in star funds and star fund managers.

  7. Hi Vidya

    Thanks for putting this together. This is a long overdue analysis of HDFC Top 100. There are two other pieces of analysis which would be really useful.
    1) Performance analysis of other funds managed by HDFC AMC in general and Mr. Prashant Jain in particular.
    2) Graph of Mr. Prashant Jain’s year on year total compensation (at least for the last 10 years) as compared to the performance of the funds he manages. I bet you that unlike the performance of his funds Mr. Jain’s compensation has only gone in one direction – upwards. Which is a great disservice to investors. So as to not be unfair to Mr. Jain perhaps we should look at this analysis for the compensation of the entire top brass of HDFC AMC (including people such as Mr. Milind Barve, etc.)

    HDFC has been milking their brands in all arenas – whether it is MF space or insurance or banking, etc. etc. They may have done great in the past but as of now their performance and competitiveness (performance to cost ratio) leaves a lot to be desired. In the MF space HDFC has been “pushing” their product via their well incentivised army of distributors. One thing I have always noticed is that the lower the performance of the fund / AMC higher is the expense ratio. And the reason for that is very simple. The AMC needs to provide higher incentives to their distributors to “push” an inferior product on to unsuspecting investors (the savvy ones will do direct). A case in point – if you remember as part of their IPO Prospectus HDFC AMC had come up with a bizzare scheme to provide equity to their distributors under a completely non-market construct. SEBI rightly saw through this and told them to back off.

    TO summarise – I would argue that AMC’s like HDFC would find it hard to lower their cost structures given desperate desire to increase / retain AUM and so need to pay more to distributors / incur higher distribution costs to sell their inferior products and “fat cat” managers will be loathe to give up their multi crore bonuses. Good funds will always have lower cost structures as distributors’ negotiating leverage is much lower (the product speaks for itself).

    As of now HDFC as a brand is over rated.

    1. Thank you for sharing your thoughts. We think MFs are becoming slowly commoditised. Money will tend towards performance and low cost. thanks, Vidya

  8. Good article from Vidya as always. Dont you think the performance of the other Star fund of yesteryears : HDFC Equity Fund is worse ?

    1. No Sir. Relative to its own category, it’s not. Largecaps have far more challenges. Thanks, Vidya

  9. Good Article. Also one should think of booking for safeguarding the gains . If you can elaborate on how to curtail losses in such long period investment will be better.

    Thanks and Regard,

    Makarand Tatke

  10. Very nice write up ๐Ÿ‘. I fully agree with all your points. I was invested in this fund ever since 1999 and finally exited the fund last year after years of under performance. Same is the case of Franklin Blue chip fund. It did very well till K Shiva Subramanian was the fund manager and slowly lost the way. Moral of the story as you pointed out correctly
    =Quote=
    “There is no such thing as buy and hold. There is only โ€˜staying invested in equitiesโ€™. The product you choose to stay with, will change with times and market conditions.”
    =Unquote=
    Same holds good for direct equities too.

Comments are closed.

Login to your account
OR

Become a PrimeInvestor!

Get stock & mutual fund recommendations

or
Have an account?
Login To Your Account
OR
Donโ€™t have an account ? Register for free