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Fund managers shifting focus to small, mid-caps

Fund managers shifting focus to small, mid-caps
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First Published: Wed, May 16 2007. 12 42 AM IST

Optimistic outlook: The schemes from HDFC, DSP Merrill Lynch and Kotak hope to mop up more than Rs1,000 crore.
Optimistic outlook: The schemes from HDFC, DSP Merrill Lynch and Kotak hope to mop up more than Rs1,000 crore.
Updated: Wed, May 16 2007. 12 42 AM IST
Fund managers and analysts are gradually becoming bullish on mid-cap and small-cap stocks.
HDFC Mutual Fund and DSP Merrill Lynch Fund Managers Ltd have lined up a HDFC Mid-cap Opportunities Fund and DSP Merrill Lynch Micro-cap Fund, respectively. Kotak Securities Ltd, under its portfolio management scheme (PMS), has launched Kotak Origin, a scheme that will invest in small-cap companies having a market-cap of Rs2,500 crore or less. Two months back, Emkay Share and Stock Brokers Ltd had also launched an 18-month, closed-ended portfolio management scheme with a key focus on mid-cap and small-cap stocks.
The three new schemes are hoping to mop up more than Rs1,000 crore, though DSP Merrill Lynch has capped its fund size at Rs500 crore.
Optimistic outlook: The schemes from HDFC, DSP Merrill Lynch and Kotak hope to mop up more than Rs1,000 crore.
These schemes are being launched at a time when these stocks are witnessing revived interest from investors. Consider the BSE mid-cap index that represents 278 mid-cap stocks. It has risen by 4.85% to 5,941 during the past month. The Sensex, which represents 30 large-cap stocks, has risen by only 2% during the same period. Until the sharp fall in the markets last May, mid-cap and small-cap stocks were outperforming their large-cap peers.
Towards the end of December, mid-cap and small-cap stocks saw a bit of a revival as the BSE mid-cap index breached its May 2006 level. In February, it was at its all-time high of 6,186, but all these gains were wiped out by early March as the index was down to 5,114, a loss of 17%.
So, what is really driving the fund managers and brokerages back to this space again?
“Before the crash in May 2006, there was an acute optimism around the mid-cap universe but after the fall, investors shunned them for a long time. Today, there is high level of risk aversion among investors,” says Shashank Khade, senior vice-president at Kotak Securities. He expects to mop up around Rs200 crore with Kotak Origin, which will lock in money for a 30-month minimum and has a starting investment limit of at least Rs10 lakh. “Since the mid-caps have started going up, investors have started churning their mid-cap portfolios” says Nihar Oza, vice-president, Brics Securities Ltd.
Emkay Share and Stock Brokers’ mid-cap scheme also carries a minimum investment limit of Rs10 lakh and defines a mid-cap stock as one with a market cap of less than Rs7,500 crore. Sameer Rachha, the portfolio manager for the scheme, declined to disclose the amount mobilized in its new schemes, but claims to have got a good response.
While the mutual-fund industry has the notorious image of launching funds at the peak of a market cycle, this time they claim that there is still a huge upside potential.
DSP Merrill Lynch Fund Managers already has an open-ended fund that invests 65% of its assets in the mid- and small-cap universe. “The existing fund looks at companies which are ranked 101 to 300 in the market cap. Our new fund is positioned to look at companies which are beyond the 300 ranking in the market cap” says S. Nagnath, president and chief investment officer. He adds that over the past month or so, the large-caps have taken a breather and the focus could now shift to mid- and small-cap stocks. Increased participation from FIIs, and interest from private equity players, is another reason for the fund house to launch a micro-cap fund.
“We looked at the trade-off between the valuations of large and mid-cap stocks and realized that the former was becoming expensive. There is a distinct re-rating opportunity in the mid-cap space” says Milind Barve, managing director of HDFC Mutual Fund. His new fund will look at companies with a market cap of Rs9,000 crore or less.
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First Published: Wed, May 16 2007. 12 42 AM IST
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