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Highly experienced managers employing an established investment process, but the average execution on the duration management side limits our conviction on this fund. HDFC Hybrid Debt (erstwhile HDFC MIP L/T) is among the relatively more aggressive funds within its category, maintaining about 25% in equity, tilted significantly towards large companies. The fixed-income side, too, is actively managed, with the manager typically maintaining a higher portfolio duration. The fund benefits from an experienced investment team and a particularly strong approach to researching equities. However, the execution on the duration-management front needs improvement. Seasoned senior managers, head of credit research Shobhit Mehrotra and CIO Prashant Jain, have led the strategy and delivered solid returns across time frames. The managers have plenty of flexibility built into their approach. The team moves weightings between stocks and bonds based on their views on the markets. Historically, the duo has maintained the equity weighting close to the higher band and has a preference for high-yielding securities as against its category peers. Conducting in-house research on the fixed-income and equity market, sectors, yield curves, and individual stocks/bonds using qualitative and quantitative analysis is the core of the investment process. Mehrotra’s core strength lies in managing credit strategies more efficiently, but he has been average on taking duration calls. The overall execution on the fixed-income side hasn't proved to be exceptional, which is a watchpoint as it composes a major part of the portfolio.On the equity side, the team pays heed to valuations while picking stocks, freely combining relative and absolute valuation methods. While assessing equities, Jain combines top-down and bottom-up analysis (with more emphasis on the latter) to identify companies with robust business models, strong balance sheets, and competitive advantages. Overall, the fund’s success relies on the active investment strategy, both on the fixed-income and equity sides. However, given that 75%-85% of the portfolio is invested in fixed-income securities, we are maintaining a cautious stance and want to see the manager doing well in terms of duration positioning. Hence, despite the exceptional team, we retain the fund’s Morningstar Analyst Rating of Neutral for all the share classes.
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