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HDFC Top 100 has posted a strong top decile performance over the last 1 year, delivering healthy alpha. Allocations in the BFSI, power, industrials and pharma spaces have contributed highest to this outperformance. More than90% of attribution is at the stock selection level, with stocks even in underweight sectors contributing positively to alpha.
Strong alpha of last 2 years from active large cap funds: are these two years the aberration or were the previous 4 years the aberration? Rahul says that CY18 and CY19 were highly polarized markets – which is unusual.CY20 and CY21 saw rapid sector rotation as the markets recovered sharply from the covid fall – another unusual phenomenon. CY22 and CY23 by contrast are seeing a healthy market after a long time – broad based rallies involving multiple sectors aided by strong economic growth and robust consumption growth. These conditions are ideal for generating alpha even in large caps – as can be seen from HDFC Top 100’s performance and Rahul believes we are in a broad based bull market that will likely continue for a lot longer. The case for active funds in large caps is stronger than ever in his view.
Will large caps outperform mid and small caps going forward because they will rise faster or fall slower? Rahul is of the view that large caps may initially fall less in a correction and then rise faster when the market resumes the next leg of its up-move.
Allocation to energy sector has been reduced in last 15months from 16.5% to a neutral 10.2%. Rahul has cut positions in OMCs where he sees fundamentals deteriorating while he has retained positions in power, utilities and upstream oil & gas, where he continues to remain bullish.
Rahul remains very optimistic on capex revival but has turned a bit cautious on valuations and has therefore reduced some positions here. He will look for opportunities to add at better valuations.
Rahul is bullish on large banks – he sees a rare confluence of strong growth visibility, high balance sheet quality and reasonable valuations in this space. He likes pharma too – domestic pharma, healthcare as well as US generics.
Our portfolios follow proper asset allocation & are constructed for the long term. Hence we have lesser to worry in the short term. We need to take proper care of asset quality though.
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