Mutual Fund idea - HSBC Dynamic

Investors can consider adding the HSBC Dynamic Fund to their portfolio. Though the fund is relatively new , it has done well to contain its downside in turbulent markets. Not only has it significantly outpaced its benchmark, the BSE 200 but it has also bettered its returns over some of the well-established large-cap funds such as Kotak 30 and Sundaram BNP Paribas Select Focus. While a good part of this outperformance can be credited to the fund’s high debt exposure, the fund’s mandate allows it to even switch completely to debt: investors should note that the high debt could limit returns when the markets look up again. On that note, the fund’s flexibility in switching to and from equity to debt also gives it a significant edge over balanced funds. This also spares investors from incurring entry and exit loads if they were to dynamically switch between equity and debt funds themselves.

Performance

In the last one year, HSBC Dynamic’s NAV has fallen by over 43 per cent, while that of its benchmark, the BSE 200, declined by over 53 per cent. The fund’s mandate that allows making tactical asset allocation calls appears to have come to its rescue. While that does make the fund reliant on the fund manager’s ability to get dynamic asset allocation calls right, it has acquitted itself well in this respect.

As early as June 2008, the fund had increased its debt exposure to 31.5 per cent. Such a high exposure to debt would have helped it pre-empt the impact of the equity fall that followed in October. Having the ability to make such dynamic asset allocation calls may also help the fund deliver returns better that that of balanced funds, which have a fixed asset allocation strategy (65-35 equity-debt). Its one-year returns lag that of balanced funds such as HDFC Prudence only marginally.

So, while the debt exposure will help the fund score over pure equity funds in the markets such as these, it may lag their returns if and when the markets turn around. In the brief four-month stint that fund had in the bull market, during September 2007-January 2008, the fund just about managed to keep pace with its benchmark.

Portfolio

In the equity portion of the fund’s portfolio, which makes up for 74 per cent of its total assets, it is the large cap stocks that find greater prominence, making up for about 54 per cent of the assets.

Mid and small-cap stocks contribute to over 10 per cent and 9 per cent, respectively. In terms of sector allocation, the fund has the highest presence in consumer non-durables, followed by that in banks and pharmaceuticals. With respect to its debt allocation, while the overall exposure to debt has moderated in recent months, it still is significant, at about 15 per cent.