Disciplined Approach Has Failed To Click

HDFC Core & Satellite Fund is essentially a large-cap fund which, under normal conditions, will not have a large-cap exposure just below 60 per cent of the total net assets. The remaining assets can be invested in the small-cap and mid-cap space to generate above-average returns. The asset management company, in its offer document, defines a large-cap company as one with a market capitalisation above Rs 2,500 crore, and small and midcap companies as those with a market capitalisation below this.

The scheme has a mandate to remain invested at all times, and at least 90 per cent of the assets should be in the equity asset class. The scheme has maintained its mandate since its inception and has not played with its asset allocation a lot.

This is very helpful for an investor as he can reap the maximum advantage out of the equity markets. More importantly, he/she can decide upon his overall asset allocation more astutely.

The average allocation to equities is 96.73 per cent of the net assets (not considering the initial two months which the scheme took to deploy its assets), which reflects the aggressive nature of the scheme. The allocation to the 'core' group has also been disciplined, ranging between 60 per cent in April 2005 to 85.85 per cent in May 2007. The 'satellite' group allocation has ranged from around 40 per cent in April 2005 to 12.72 per cent in August 2007.

The scheme has been managed by three different fund managers at different points of time. It is currently managed by Vinay Kulkarni. The change of guard has certainly not affected the scheme's investment processes.

However, the discipline in the investment processes has not translated into a good absolute performance, which is disappointing. The scheme has underperformed both in the short term as well as long run.

In the last one year, it has underperformed its benchmark BSE 200 by 18.30 per cent. In terms of three-year returns, it has managed to barely match the returns generated by the benchmark.

Considering the rally in recent times (which has been led by large-cap stocks), the underperformance of the scheme comes as a surprise.

The scheme follows an investment strategy to invest in companies which are trading below their intrinsic value for the 'core' part of the portfolio, and is a value fund. Most of the value funds have not been very successful in India from the returns perspective as high-growth companies have been the chief driver of the rally so far.

HDFC Core & satellite Fund currently manages a moderate corpus of Rs 586.57 crore, which has seen steady redemptions in the last few quarters.

The portfolio has seen some changes in the last two quarters - positions in the technology space have been pruned after the disappointing show in the last quarter. Currently, the scheme has exposure to only Satyam, TCS and Infosys Technologies which together account for only 7.87 per cent of the net assets. Exposure to metals has also been brought down substantially whereas exposure to the banking sector has gone up in the last two quarters.

The scheme has also completely pulled out of the housing & construction space, where it had a decent exposure in the beginning of the year. The new theme which the scheme has invested into is media & entertainment through scrips like TV Today (1.49 per cent), HT Media (2.10 per cent) and ZEE Entertainment (1.79 per cent).

The portfolio seems to be optimally diversified across 32 stocks, where top 10 holding account for half the net assets.

In spite of having the right recipe for success, the scheme has been a laggard.

Considering its three-year track record, investors would be advised to include the scheme only as a support in their overall portfolio.