First-of-its-kind thematic fund targets huge opportunity

Affordable housing is among the highest priorities for this Government - and for good reason, since housing touches more sectors and creates more jobs than any other commercial activity. HDFC - a brand synonymous with housing - now introduces a thematic fund focusing on the hugely promising housing theme. Srinivas takes us through the contours of this first-of-a-kind thematic offering, which comes in the form of a closed ended fund, with a 10-20% exposure to housing debt, an 80-90% exposure to a broad range of sectors connected with housing and an ability to use derivatives to hedge the portfolio and lock in gains.

WF: Considering the secular nature of the housing theme, why did you not opt for an open ended structure for this first-of-its-kind thematic fund?

Srinivas: Affordability of housing has improved with stable prices, improvement income levels and decline in mortgage rates. Further, Housing for All by 2022, program of the government has started gaining momentum and we anticipate a gestation period for this opportunity to deliver.

Being a thematic fund and keeping in mind the gestation period of such investments, a close ended fund provides an opportunity to investors to remain invested through the tenure of the scheme and reap the potential rewards of such investments.

WF: Your fund mandate allows you up to 20% in debt instruments. Do you expect to maintain around 20% in debt or is it to be used only selectively when valuations appear too stretched? What will be the level of debt exposure you plan when casting the initial portfolio of this fund?

Srinivas: The scheme aims to play both the equity and debt sides of the theme, given the internal capabilities of the group, the debt component will consist of debt of companies which offers above average risk reward ratio. Currently, we anticipate that the debt component in the scheme will range between 10-20% of the portfolio.

WF: What will be your dividend policy in this fund? In what manner can investors benefit from locking in profits in this closed ended structure?

Srinivas: The scheme will pay dividend subject to availability of distributable surplus. Based on market conditions, the fund manager may use derivatives which will aim to de-risk he portfolio by providing downside protection.

WF: What are the sectors you will consider as your investment universe for this fund?

Srinivas: The Fund would endeavour to generate capital appreciation by investing in entities belonging to businesses that are engaged in and/or expected to benefit out of the demand for housing in India. The indicative list of business activities considered under the 'Housing Theme" will generally include:

1. Real Estate Developers

2. Financial Services providing housing finance

3. Allied business activities such as

1. Construction

2. Cement & Cement product such as concrete, aggregates, bricks, etc.

3. Chemical will include paints, adhesives, water-proofing chemicals, etc.

4. Metals will include iron & steel, aluminium, copper, zinc, etc.

5. Consumer durables will include home appliances, electronic items, furniture & fixtures, etc.

6. Additionally building products will include glass, roofing, siding, lumber, plywood, insulation, wallboard, windows, doors, cabinets, countertops, HVAC, piping, plumbing fixtures/fittings, flooring, electrical products and many other products

4. Any other business activity which the fund manager thinks to be allied to the housing theme

For complete details on the fund investment strategy refer to the Scheme Information Document/ Key Information Memorandum available on the website www.hdfcfund.com/ ISC`s and with distributors.

WF: What are the key drivers for the housing theme in your view?

Srinivas: The investment rationale for the scheme is driven by the following factors

1. Housing sector is likely to be a big growth driver for the economy

2. The government of India`s housing-construction initiative, 'Housing for All' aims to build 50 mn low-cost houses over the next five years (i.e. by 2022).

3. Immediate objective of Pradhan Mantri Awas Yojana (PMAY-Gramin is to construct houses for 1 crore people living in kutcha/dilapidated houses by FY19. PMAY-Urban has a target to build 1.12 crore houses by FY22

4. Government support in the form of direct subsidies and cheaper loans to achieve its target.

5. In the past five years, mortgage rates have dropped 250bps. Lower interest rates to enhance demand for housing.

6. Housing is a broad theme that impacts multiple industries - Banking and housing finance, insurance, cement, steel, consumer durables, sanitary ware, cables, lighting, glass, metal fabrication, infrastructure, power, paints, air-conditioners, building products and capital goods (derived demand) etc.

WF: Between urban housing and rural housing, which theme appears to offer better growth prospects? Which theme will you focus on more between the two when identifying investment opportunities and are the target companies/sectors very different between the two themes?

Srinivas: The scheme will target opportunities within the housing theme and corresponding allied businesses as mentioned previously. Due to the nature of these businesses, the focus will be more company specific rather than the geographic in nature. Due to the nature of these industries, they cater to the PAN India demand. This approach allows the fund flexibility to target opportunities regardless of the geographic footprint.

WF: HDFC as a brand is synonymous with housing. In what way do you plan to leverage the extensive insights into housing that your Group enjoys, to identifying promising opportunities for this fund?

Srinivas: The HDFC group has been a part of this industry through financing for over 40 years. Through its various subsidiaries, the group is well entrenched across various segments of housing. HDFC AMC aims to leverage this insight to take advantage of opportunities that currently exist in these sectors.

WF: One worry that some distributors will have is about selling a closed ended fund at a time when markets are scaling new peaks and valuations are well above historical averages. How can you address these concerns?

Srinivas: This question can be broken up into two elements, while the overall market continues to remain attractive, there are segments of the market that continue to offer relative value. The housing and allied businesses that form part of this theme continue to offer opportunities for long term investors. Fundamentally, despite the small size of this business the theme offers significant growth potential on the back of the need for affordable housing across the country and clear government focus. Both these points make the theme a compelling investment opportunity.

WF: What is the benchmark of this scheme?

Srinivas: The benchmark of the scheme is the India Housing & Allied Businesses Index, an index developed in collaboration with IISL. The index is a basket of a minimum of 50 securities across different sectors associated with the housing theme. The index is rebalanced semi-annually and realigned quarterly to ensure that the index represents all sectors proportionately in line with the available opportunity available in each of these underlying sectors.

Disclaimer

The views are expressed by Mr Srinivas Rao Ravuri, Fund Manager - Equities of HDFC Asset Management Company Limited (HDFC AMC), as on 16th November 2017. The views are based on internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information given is for general purposes only. Past performance may or may not be sustained in future. The replies are given in summary form and do not purport to be complete. The views / information provided do not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this information. The information/ data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Stocks/Sectors referred above are illustrative and not recommended by HDFC Mutual Fund / AMC. The Fund may or may not have any present or future positions in these sectors. HDFC Mutual Fund/AMC is not guaranteeing any returns on investments made in the Scheme. Neither HDFC AMC and HDFC Mutual Fund nor any person connected with them, accepts any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein.

Disclaimer of India Housing & Allied Businesses Index

HDFC Housing Opportunities Fund - Series 1 offered by HDFC Asset Management Company Limited is not sponsored, endorsed, sold or promoted by India Index Services & Products Limited (IISL). IISL does not make any representation or warranty, express or implied (including warranties of merchantability or fitness for particular purpose or use) and disclaims all liability to the owners of HDFC Housing Opportunities Fund - Series 1or any member of the public regarding the advisability of investing in securities generally or in the HDFC Housing Opportunities Fund - Series 1linked to the India Housing & Allied Businesses Index or particularly in the ability of the Index to track general stock market performance in India. Please read the full Disclaimers in relation to the HDFC Housing Opportunities Fund - Series 1 in the in the Scheme Information Document.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY

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