Bulls have made a comeback on Dalal Street. However, while the Nifty and Sensex are hovering at all-time highs, the midcap index is still 14 percent away from the peak. The months of April, May and June saw midcap stocks & therefore midcap funds take a serious drubbing, but the question is, is the worst of the midcap smallcap fall really over? Is this a good time to start investing in these funds for the long term? Which are the better performing funds and who are the well performing midcap and smallcap fund managers, who are these people who perhaps you can think of backing? In a special interview to CNBC-TV18, Kshitiz Mahajan of Complete Circle Consultants answers all of these queries.
Q: First things first, is the worst really over, is this the time to be talking about midcap funds?
A: I will take a minute to explain what has actually happened. Obviously there are internal reason, there are external reasons. We have seen some companies wherein some issues, audit issues, some other issues are there. But if you actually see broadly, because of the new frame of Sebi, wherein they have recapitalised the market capitalization in terms of the numbers of stocks, like in largecap they are saying top 100, midcap they are saying 100-250, what has happened is, lot of funds earlier were having a mix of portfolios. In largecap, there is 70 percent largecap, 30 percent midcap, and midcap was not getting over a 250th company, it was going down also.
Now, as per the new regulation, you need to have 80 percent in top 100 stocks because of which many of the funds, they have to sell the midcaps which are at the lower end. Now that is one of the reason that we have seen little bit of correction on the index side.
Second reason, obviously last year return if you actually look at, midcap was 47 percent up and smallcap was 58 percent up. So, this year year-to-date (YTD) if you actually see, calendar year I am talking about, your midcap is down by 10 percent and smallcap is down by 14 percent. Having said that, last one month return is 3 percent plus for both index. So, yes, once should start looking at midcap side of the portfolio and smallcap side of the portfolio, but one has to be very selective about the funds what they are picking at, what type of quality they are looking at.
Q: Now the last six months are obviously not going to look very comfortable; I was just looking at a very quick glance through of the performance. So here is how the numbers stack up. Most of the midcap funds are obviously in negative territory for looking at six months performance. The best of the lot, the best five if you are talking about, just performance, and I have not taken the funds which have very small AUM size, so relatively speaking the Axis Midcap Fund did really well because that is a fund that is actually up 5 percent even in this time. The Motilal Oswal Midcap 30 is at least flat, it has not fallen as much. The Invesco Midcap is down 4.5 percent, the DSP BlackRock Midcap is down 5 percent, HDFC Midcap Opportunities is down 5 percent. So we are saying down, yet counting them in the top 5 because the fall is lesser. The down list, if you are talking about the worst performing midcap funds in the last six months, you have got a BNP Paribas Midcap which is down 14 percent, SBI Magnum Midcap is down 13 percent, Edelweiss Midcap is down 10 percent, Sundaram Midcap is down about 9 percent, the ICICI Prudential Midcap is down 9.5 percent, even Reliance Growth. A lot of these funds have suffered a fall anywhere between 7 and 14 percent. Now this is what we know, this is past performance, the question is how do we start picking for the future?
A: First of all, when you see the returns on the midcap index or fund side, one needs to understand his selection of fund is based on his goal planning. So broader assumption is that you go for 40-40-20, 40 percent in multicap funds, 40 percent in largecap funds, and 20 percent in midcap and smallcap fund. For a new investor, not even smallcap, only midcap funds. So first is this.
Second is you should look at the qualitative part of the selection part also. Like when you pick or choose a fund, everything is available about that fund on websites -- what is the investment philosophy of that fund, what is the investment style of that fund. Now depending on that because right now people are talking about it is being corrected, but one needs to understand that there are parameters on which these fund runs. Obviously there is a track to it, and moreover people look at the track of the returns. They need to understand return is outcome of the input which is being participated by or which is being generated by fund manager. Input is when he picks and chooses quality business and quality management. Both need to marry to give a better return.
Q: I want to do quickly one thing, go through some of these funds, the best and the so called worst and just take your quick first glance sort of thoughts about these funds. Let us start with the topper - Axis has really outclassed a lot of people, not just their midcap funds, some of their multi-cap funds are also doing really well. So what do you think of the Axis Midcap, is this a fluke performance, suddenly this 5 percent up move at a time when the market has been down?
A: Shreyash Devalkar is a very hands-on guy on the midcap side. He has been known for his early picks and if you actually ask me, the average market capitalization of this Axis Midcap Fund is Rs 24,000 crore. So, he is into high-end midcaps. So, basically he is looking at businesses like -- let us say IndusInd Bank he is looking at, and few other businesses, Bajaj Finance, which are high-end midcaps I am talking about right now, so, the percentage of participation in his portfolio is very clear that he wants to have earning growth of 23-24 percent in his portfolio. So, right now the P/E looks stretched because it is at 30-31 but the earnings are supporting.
Second thing if you look at the beta also and standard deviation which gives you a risk-return matrix, they are also very well in control. So, you have midcap index whose standard deviation is close to about 14, the fund standard deviation is also close to about 15-15.5 and the beta is less than 1. So, beta is a very simple definition. It is 1, that is the index beta, if it is more than 1, then it is riskier, and if less than 1, then it is less riskier; that is how it is.
Q: We will talk about your recommendations later, but right now just sort of first glance the Invesco Midcap, the DSP Blackrock Midcap. How do these funds look because relatively they have not been as badly impacted as the others?
A: Motilal Oswal 30 is going through a total transformation because there is a change of guard now. Akash Singhania has taken over and by scheme they were supposed to invest only in their initial companies from 75 percent of the portfolio, from 100 to 150th company. With the new regulation, the scope of investment has improved from 100 to 250th company; that is what has happened.
Second is, they have changed the portfolio by 75-80 percent. So you actually see, one we talk about that earning expected number is 20 percent, or 30 percent. Last three quarters earnings number for the portfolio is 35 percent. So that itself gives you a confidence and expected earning is 29 percent. So that portfolio will do well and that is the reason it has taken less beating vis-à-vis other funds.
Q: Just a quick word maybe on the HDFC Midcap Opportunities, of course one of the largest funds of the country.
A: Hats-off to Chirag Setalvad the way he has worked on the portfolio. However, now because the size is become too big, it is Rs 20,000 crore, the past performance speaks for itself, he has done a great job, but in Rs 20,000 crore his average market captialisation is Rs 12,000-13,000 crore of the overall portfolio. So, I feel rather than getting into HDFC Midcap Fund, one should look at HDFC Smallcap Fund. Both funds are being managed by Chirag Setalvad only.
Q: Let us look at the worst performing five midcap funds in this last six month period. BNP Paribas Midcap Fund down 14 percent, even the SBI Midcap is down about 14 percent. Is this just a bad spell that these funds went in or do you like them overall?
A: If you actually ask me, both the funds are good funds. It is just that because of the recent changes and because of the holdings which they were having and couple of stocks which have not done well, so, because of that these funds have taken a beating. Otherwise, overall, last five year return is close to about 19-20 percent on both the funds. So last six months have been really bad for these funds.
Q: There is the Tata Midcap, I am not too sure about its AUM, there is also Sundaram Midcap which is down about 9 percent, and a giant like ICICI Prudential even their midcap fund could not be spared the blushes - down about 9 percent. Any reason to worry if you are in these funds?
A: I think ICICI Midcap Fund if you actually ask me, in fact as a house they were not propagating midcap investments. If you see, the size of the fund is Rs 1,490 crore only. So overall their AUM is more in balanced funds if you actually see, Balanced Advantage Fund or Balanced Fund, and value discovery is obviously they are one of the leading fund. My only advice to most of the clients who are having their money invested into these funds is that just stick around. These are the funds which have done well. If you actually see last 18 months return, they are still much more positive than normal Nifty funds.
Q: If you are in the BNP Paribas or the SBI Magnum Midcap or the ICICI Prudential Midcap or Sundaram for that matter, no need to panic or do nothing as of now?
A: This is the time when we have already seen the pain period. So rather than just taking a call now, just stick around because this dust will take some time to settle, maybe two to three months more. So I will not say that things will start looking up in a couple of weeks' time, it will take some time, but just stick around.
Q: I will throw a couple of more names at you, the Reliance Growth Fund, the L&T Midcap.
A: Reliance is now a midcap, earlier it used to be a mix of largecap and midcap. Because of Nomenclature change and because of category change, they have gone through the entire portfolio turnaround and that is one of the reason wherein you have seen that it has not done well. However, otherwise, it is a good fund to be in.
Q: Let us now move to small cap funds and once again I have picked top five winners and the losers going by price performance. The HDFC Smallcap is down 5 percent, small cap I saw all funds, there wasn't a single smallcap fund that was in positive territory. IDBI Smallcap down 8 percent, L&T Emerging business, Franklin Fund down about 9 percent, Reliance Smallcap 13 percent and these are the better performing funds because if I start talking about the poor performing funds then you are talking about cuts between 15-20 percent. For example the Sundaram Smallcap, DSP Blackrock Smallcap, ICICI Pru Smallcap funds, these are really bleeding 16-17 percent lower. Looking at this, it looks a little scary right now. Should one be think of smallcap funds right now at all or just wait for a bit?
A: I believe most of these smallcaps, they are not even taking money right now. DSP Smallcap is not accepting any new money, ICICI Smallcap shut their acceptance of money recently and SBI Smallcap has recently opened where per pan you can do Rs 25000 SIP. So, my only suggestion is that this is not the right time to put any lump sum money in smallcap. All one can do is they can just as a portfolio allocation which is 10-20 percent start putting SIP in smallcaps.
Q: For anybody who might be in these funds right now, the ones that I just named, if there are any switches that are required then please alert our viewers to that. If there is anything you need to do where you need to redeem close, take a loss and move out?
A: For next 2-3 months just stick around because if you see after the fall also most of these funds have given 19-23 percent in last five years. What you are telling is just for six months, that is the nature of our markets, you get highs, you get lows, that will happen. So, rather than just booking any profits or losses, just stick around.
Q: None of these names seem to have a pedigree issue or a long term performance issue that investor needs to worry at all?
A: Not at all. Investor has to worry about what type of stock holdings these portfolios are having in their portfolio and how many stocks they are looking into, that is one of the key point which they should look at.
Q: If you are looking at parking fresh money in midcap funds you have got top 4 or 5 recommendations?
A: Franklin India Prima Plus is my first recommendation. Janakiraman is an old hand in the system and who is a known specialist of midcaps and smallcaps. They have been managing the fund very well. The average market cap for the fund is close to about Rs 19000 crore and the beta is very well within the limit, it is 0.79 only. So, that is one key factors. Janakiraman has been known for picking few of these ideas very early. When it comes to midcaps, it becomes more important that you should look at the quality of management along with the business. So, you might see the numbers coming 30 percent as earning numbers but then if management is not compliant then it can cause some sort of problem in terms of return expectations. So, this fund is one fund which should be a part of client's portfolio.
The other fund is Motilal Oswal Midcap 30 fund. Other funds numbers we are talking about forward earnings, for this fund last three quarters numbers are 35 percent earnings growth of the underlying portfolio.
Q: The underlying companies that have really worked for the Motilal Oswal Midcap 30 fund?
A: Yes. May be last three years returns right now is not looking good but they have changed the entire portfolio and my very strong recommendation is that one should look at this portfolio.
Q: The next fund on your list?
A: Next fund is ICICI Pru Midcap fund. Mrinal Singh is a great guy. He has been managing the value discovery part also and is with the AMC for quite some time. In fact they were not propagating the scheme at all. After this correction, now they have started talking about it. They see that they can create some value for their clients because there are some stocks which are available at good valuations and now they are looking at participating into this fund. So, one can look at ICICI Pru Midcap fund.
Q: The star that we were discussing earlier, the Axis Midcap fund. What is working so well for this fund, tell us a little about its portfolio?
A: The good part about this guy Shreyash is that he has been with midcap space for quite some time. The picks which they have chosen were high quality midcaps. The name which I will take, almost a year back if you had to invest into Bajaj, Page Industries or Bosch, there are few companies which he has picked which have delivered very good numbers.
Q: Now let us come to smallcaps and the caveats are already in place, if at all it should not be more than 10 percent of your portfolio?
A: Yes nor more than 10 percent of the portfolio and that too in a staggered manner. Right now SIP is the right way and not lump sum amount in smallcaps because we might see some further movement.
Q: Smallcap funds technically speaking have become far more riskier after the Sebi norms, wouldn't you say because now by definition the regulator is saying if it is a smallcap fund, 65 percent in smallcap companies…..
A: It has to be less than Rs 12000 marketcap - 65 percent. So, out of 25-26 smallcap funds we have shortlisted these four funds depending on the credibility of the fund manager, the type of portfolio, the type of investment philosophy, it becomes very important when you invest into smallcap funds.
Q: I am looking at your list of recommendations - The HDFC Smallcap fund and instead of putting money in the HDFC Midcap, you might be better off in the smallcap why so?
A: One is, the size of the fund right now is Rs 4000 crore only and the average companies market cap what they are holding is also close to about Rs 4500-5000 crore. My sense is that midcap fund has become very big. Chirag is managing both the funds and now they have more opportunities to buy these smallcap companies, earlier that opportunity was in midcap also which is now less, you have limited universe for that. So, this becomes much more relevant for clients.
Q: Let us move to the Franklin India Smaller Companies fund?
A: This is a very small fund, the size of the fund is Rs 7000 crore and again the marketcap is Rs 7000. So, after the recategorisation, the portfolio construct they have, they have actually taken very high earning growth companies in smallcap space also. The average earnings growth expected is close to about 26-27 percent for this year which is very much inline with most of the good funds earnings growth. Normally on largecap space if you expect 15-18 percent, on smallcap that type of earning is something you should look at. So, the expectations are that this fund will do well.
Q: Two more on your list - SBI Smallcap and the DSP Blackrock Smallcap?
A: DSP and SBI both funds are not open. SBI has started taking SIP. Per individual you can do Rs 25000 SIP on a monthly basis. When they had opened month and a half back, the total amount of SIP they had gathered is Rs 84 crore. R Srinivasan is one of the best guys on the smallcap space. The way he is picking up things. So, both of them are saying we don't require money but my sense is that DSP will now open up. Maybe the returns look little bad on the one year basis for DSP Smallcap fund but there is a opportunity when you see these type of falls and you get some value unwinding for your clients. So, my sense is that most likely they will open up DSP Smallcap fund. If you actually see they are very concentrated on top 10 stocks. 30 percent of the portfolio is in top 10 stocks. Vinit Sambre everybody knows that he is one of the key guys in picking up good ideas, quality ideas on smallcap space also. They are the first ones who stopped accepting money in their funds.
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