The Hindu Business Line : HSBC Equity Fund: Hold

THERE has been a slowdown in the performance of HSBC Equity Fund over the past couple of quarters. On a one-year basis, the performance is now just in line with that of its peers, as it has delivered a 53 per cent return. This is in contrast to the substantial out-performance of its peers in the first two years after launch.

The stringent focus on large cap stocks has, to an extent, capped the fund's returns in relation to that of other equity funds with larger exposures to mid-cap stocks.

The stock and sector choices the fund has made, in terms of its underweight position in FMCGs and significant weights in petroleum stocks, have also impacted returns. Investors can, however, hold the fund, given its record of beating its benchmark over a two-year period.

Suitability: HSBC Equity takes measured exposures to individual stocks, but focused exposures to the three or four sectors it fancies. These sector choices play a key role in the performance.

A focus on large-cap stocks should reduce the volatility of returns from the HSBC Equity Fund vis-à-vis funds with a sizeable mid-cap exposure. The fund is suitable for investors with a normal appetite for equity risk.

Performance: With returns of about 53 per cent over the past one year, HSBC Equity Fund's performance is in line with funds such as Templeton India Growth Fund, Franklin India Prima Plus and Magnum Equity Fund, which also invest mainly in large cap stocks.

The performance however, trails that of the HDFC Top 200 Fund and a range of other equity funds that have a larger mid-cap exposure. HSBC Equity allocates over 90 per cent of its portfolio to large cap stocks (stocks with a market capitalisation of Rs 2,000 crore or more).

The fund has also stayed off the beaten track in terms of the sectors it favours. In recent months, banks, automobiles, software and petroleum have been the key exposures. The fund has been underweight in sectors such as capital goods and FMCGs, which have been at the forefront of the recent rally. These choices have probably impacted the fund's returns relative to others in the near term.

The sectoral weights in HSBC Equity are determined by its philosophy of business cycle investing. The fund decides on the sector weights based on its view of where different sectors in the economy at poised within the business cycle, at any point in time.

This strategy appears to have the potential to deliver good returns in the current context, as macro-economic factors have assumed a large role in stock performance. As of July, banks, petroleum products, software, and steel were the top exposures.

Fund facts: HSBC Equity Fund was launched in December 2002. The fund is benchmarked to the BSE 200. The fund's returns since inception stand at about 70 per cent on an annualised basis, against a 42 per cent return on its benchmark. It appears to have suffered significant outflows over the past six months, with its net assets declining from over Rs 1,600 crore in January to about Rs 1,272 crore by end-July 2005.

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