Date:24/04/2005 URL: http://www.thehindubusinessline.com/bline/iw/2005/04/24/stories/2005042400541000.htm

Back HDFC Core & Satellite Fund: Hold

Suresh Krishnamurthy

INVESTORS in HDFC Core & Satellite Fund can stay with the fund. Its performance since its launch in September 2004 has not been impressive.

It has lagged its benchmark, BSE-200, for some of this time. Returns, till date, are also not very superior to that of the index. The fund also lags a number of its peers.

The fund's strategy could, however, be the right prescription for the uncertain times ahead. The fund's mandate is to invest 60-80 per cent in large-cap companies. This would form the core of the portfolio. The rest of the funds would be invested in smaller companies — the satellite that revolves around the core. In addition, the investment strategy involves a tilt in favour of `value investing' — an approach in which stocks trading below their intrinsic value need to be identified.

The large-cap focus appears ideal, considering that large-cap stocks appear more appropriately valued than mid-cap and small-cap stocks. This would afford protection in the event of a contraction in the economy's growth rate or a decline in liquidity at the bourses. At the same time, exposure to smaller companies ensures that the upside potential is not completely eliminated.

Performance: The fund has registered returns of 23.9 per cent since launch. During the same period, the BSE-200 recorded 20 per cent returns. However, from launch till February, the fund lagged its benchmark marginally.

Portfolio allocation: The fund is medium-sized, with assets under management of about Rs 358 crore. The fund is almost fully invested with a cash position of less than 2 per cent. The fund has invested about 69 per cent in core stocks, and about 29 per cent in satellite stocks.

Top core stocks in the portfolio are State Bank of India, Infosys, ACC, ITC and BHEL. Top satellite stocks in the portfolio are Chennai Petroleum, KEC International, Amtek Auto, Chennai Petroleum, Century Textiles and CMC.

The allocation across stocks sports a concentrated profile, with the top ten accounting for 60 per cent of net assets. Most diversified equity schemes restrict the exposure of the top ten stocks to 30-40 per cent. There are also just 28 stocks in the portfolio.

Sectors such as auto, construction and cement, banks and capital goods each accounted for about 10 per cent of net assets with software topping the charts with an allocation of 20 per cent.

The concentrated investment allocation enhances the risk involved considerably.