Size(able) benefits7 min read . Updated: 11 Oct 2009, 09:47 PM IST
If you have been investing in the stock market, you know that there are only two ways of looking at mid-cap funds: Either you are attracted by their phenomenal growth opportunities and don’t mind the risks that come bundled, or you would rather steer clear of any adventurous ride with these funds.
If you are not looking at pure mid- or large-cap offerings, you could consider a new category: mid-plus large-cap funds.
These funds have some exposure to mid-cap funds, which is balanced with an even bigger exposure to large-cap funds.
On an average, mid-plus large-cap funds have invested 40-70% of their portfolio in large-cap stocks over the past year. These don’t include sector, thematic or speciality funds.
The five schemes analysed here are toppers in terms of their ability to generate extra returns, protect the downside and deliver consistently.
Since 2003, this fund has beaten the category average every year. It has also impressed during both favourable and unfavourable market conditions.
The fund’s performance in 2007 was impressive at 70% (category average: 59%). A high mid- and small-cap exposure along with considerable allocation to energy helped it. In the stock market crash that followed, the fund resorted to defensives and cash. In the bear phase between 8 January 2008 and 9 March, it shed 49.5% (category average: 55%). But when the market began to rise in March, the manager wasn’t very quick in lowering his cash allocation—and did so mainly in May. Neither did he go heavy on the booming sectors. As a result, the fund delivered 95% (category average: 104%) between 9 March and 30 September.
If erring on the side of caution is typical of the fund manager’s style, so is his rigorous diversification. Exposure to the top 10 holdings is generally capped at 35% and single-stock allocation has not crossed 5%, barring a few large caps. The fund does take short-term bets, and in the long-term holdings, intermittent profit booking does take place.
This fund has evolved from a brash and undisciplined offering to a well-diversified player with excellent downside protection abilities and decent returns.
Its big bets in technology helped it beat the competition in 1998 and 1999, but led to a dramatic fall in 2000. Since 2001, the fund has maintained a relatively higher bias to large caps to provide stability, but has consistently beaten the Sensex. And since then in each quarter that the category average has been in red, Prima Plus has contained its fall to a lower level.
In 2007, the fund manager largely stayed away from metals, power and real estate. This led to a tepid performance, though he beat the Sensex. In 2008, he preferred to be almost fully invested (average equity exposure of 95%), despite the leeway to invest up to 40% in debt and 20% in cash. Still, it shed a relatively lesser 47.71% (category average: 53.35%). The large-cap bias and increased exposure to defensives came to its aid. What you can expect from this fund is stable and consistent, though not chart-topping, returns.
We like this fund for its solid long-term record and skilled management. Its historical performance has been impressive, but in recent years its performance has got investors worried. In 2006, it was an average performer due to a high exposure to defensives. In 2007, its category underperformance was a result of wrong sector moves.
But ever since a new fund manager took over in early 2002, it has shed less than the category average in all declining quarters, barring June 2004 when the fall was in line with the average. The fund’s success in standing upright in a bear market such as 2008, without resorting to debt or high-cash levels, is a testimony to the fund manager’s proficiency and skill. Here, it was the large-cap bias and exposure to fast moving consumer goods and healthcare that came to the fund manager’s aid and restricted the fall to 45% (category average: -53%). In the recent rally (9 March-30 September), the fund gained a striking 119% (category average: 104%).
It sports a predominantly large-cap portfolio. Those comfortable with a well-diversified, large-cap-oriented portfolio should consider this fund.
In the 13 years of its existence, this fund has underperformed the annual category average just twice (1998 and 2000).
One would expect a fund with a preference for smaller companies to crash in the carnage of 2008. Not so. Its fall of 54% was not too harsh compared with other funds, and was in line with the specific category average. What came to its rescue were the aggressive cash calls, exposure to derivatives and a highly diversified portfolio.
The fund manager chases growth but does not adhere to a quick entry-exit policy, sticking to a buy-and-hold philosophy. As per the August portfolio, the fund manager was most concentrated on financials, with a 14% exposure to the sector, up from 7% in March. Software followed at 6.33% with picks such as HCL Technologies, Infosys Technologies and Financial Technologies (India). In August, the manager claimed to be bullish on the pipes industry.
Over the past year, the average allocation to large-caps has been 42%. Investors looking for a mid-cap offering that delivers but does not compromise on risk should consider this option.
Launched in 2005, it impressed the very next year. Though it was on a high in 2007 with a return of 93%, it did not fall off the cliff when the markets plummeted in 2008. The great return of 2007 was mainly due to the last quarter performance. A new fund manager took over in November 2008 and in the next two months, exposure to large-caps stood at around 20%. This enabled the fund to deliver 54.66% (category average: 25.70%) in that quarter.
And when the bears took control in 2008, the manager stayed grounded by resorting to cash (average: 20%), diversifying his equity portfolio (average: 32 stocks) and raising the large-cap exposure (average: 37%).
Between 9 March and 30 September, this fund rallied with a return of 126%. As per the August portfolio, the fund manager bet heavily on energy (19.67%) and financials (10.29%). But he was well diversified at the stock level as the largest holding was not even 5%. With the highest risk premium in its category, investors here are a satisfied lot.
The net asset values (NAVs) of 379 equity schemes registered a 52-week high last week, and fund managers expect the shares to appreciate even further. Predictably, they have reduced their cash-heavy position, which they feel has helped reach the mark. In March, managers were not sure of the direction of the markets, which led to the building up of average cash levels in equity schemes. This hovered at 15-20%. Currently, cash levels in equity schemes have dropped to about 8% of total assets. Analysts also believe there is enough liquidity still left to drive the markets.
Invest | Technology stocks
Technology stocks delivered an average return of 113.12% between 9 March and 31 August. Given their impressive performance, as many as 25 fund houses have increased their exposure to the information technology (IT) space. One of the most notable big performers has been Satyam. Between April and July, the number of Satyam shares in the portfolios of mutual funds went up from 808,000 to 20 million, a whopping 2,471% jump. The number of funds buying the stock went up from four to 18 (in July). MphasiS and Wipro are the other tech favourites.
Buy | Large-caps
This year, fund managers seem to be playing safe by sticking to large-caps. In February, open-ended diversified equity funds collectively allocated 37.39% of their assets to Sensex stocks. By July, the number didn’t fall, it went up marginally to 40.37%. This has been the highest in 36 months from August 2006 to July. The change in the preferences of stocks, too, is interesting. HDFC and ICICI Bank witnessed an increase of 633% and 326%, respectively, in the number of shares held. State Bank of India showed an insignificant rise of 0.63%. Wipro and Tata Consultancy Services saw an increase of 125% and 103%, respectively. Surprisingly, Infosys Technologies saw a fall of 2.5% during the same period. Reliance Communications fell out of favour with a drop of 32.29%. Bharti Airtel saw a rise of 46.82%.
Track | Stocks that rallied most
One look at the portfolios of diversified equity- and tax-planning funds between 9 March and 31 August, and you will see that the stocks that rallied the most were not among fund manager favourites. Though the BSE 500, as a whole, went up by 102.63% during this period, its top 10 stocks were up by an average of 496%. Hindustan Oil Exploration was the best performer with a return of 736%. Yet, it almost got overlooked by the diversified equity- and tax-planning funds. It was only in August that HSBC Progressive Themes bought 270,000 shares of the stock.
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