4 Large & Mid Cap funds to consider

Nov 21, 2019

In the ‘Equity: Large & Mid Cap’ category, our analysts revisited four funds and assigned Silver, Bronze and Neutral ratings. The regulator defines such funds as those with a minimum 35% of total assets in large-cap stocks anda a minimum of 35% in mid-cap stocks.

The funds in this category are benchmarked against the S&P BSE 200 India TR.

  • Fund: Mirae Asset Emerging Bluechip
  • Fund Manager: Neelesh Surana, Ankit Jain
  • Star Rating: 5 stars
  • Analyst Rating: Silver
  • Date of Analysis: August 2019
  • Analyst: Nehal Meshram

The manager’s distinctive stock picking ability and skilled execution are the defining factors. Its long record of excellence, the tenure and depth of its management team, and its adherence to a research-intensive investment process hold our conviction in its prospects, but we believe there is substantial key-person risk.

The fund traditionally has been mid-caporiented, but since last year it is being positioned as a large- and mid-cap fund driven by SEBI regulations. The change is not dramatic: Since inception the fund has maintained a 25%-30% allocation to large caps, and now with the new benchmark Nifty Large Midcap 250 Index there is a 10%-15% increase in large caps.

Lead manager Surana is quite experienced and also heads the equity function as CIO. He is an accomplished manager who delivered above-average returns with his bottom-up stock-picking approach. Jain started comanaging this fund in January 2019 and has been with the fund house since 2015. The portfolio managers are aided by a relatively stable and experienced investment team comprising of three research analysts, including head of research Harshad Borawake and two dealers with an average overall experience of 10 years. Our confidence stems from the presence of Surana, who has been associated with this fund since its inception. The fund’s long-standing process relies on proprietary models and research.

The strategy is centred on a bottom-up stock-picking, and the team combines quantitative screens and fundamental analysis to find undervalued companies with strong balance sheets, earnings growth, and cash flows. Detailed company financial modelling focusing on revenue drivers and margins is used when calculating company valuations but, importantly, with an emphasis on long-term earnings. Surana sticks to his convictions even if the situation is contrary to his investment decision. Alpha generation is driven mainly by superior stock selection and not by sector rotation. The most promising stocks are added to a portfolio of 60-65 holdings, minimising concentration and liquidity risk.

With this strategy, the fund has delivered above-average returns. The lower expense ratio vis-a-vis peers also makes the fund more appealing.

  • Fund: Franklin India Equity Advantage
  • Fund Manager: Lakshmikanth Reddy
  • Star Rating: 3 stars
  • Analyst Rating: Bronze
  • Date of Analysis: August 2019
  • Analyst: Himanshu Srivastava

Last year the fund’s investment strategy underwent a change to comply with SEBI’s regulation on fund categorisation. It is now categorised as a “large- and mid-cap fund,” which is a shift from its erstwhile flexicap approach. Consequently, the fund’s name also changed to Franklin India Equity Advantage Fund.

Although it’s a significant change in the strategy, we believe that the investment team has the wherewithal to run this strategy given its competence and experience.

Other aspects of the fund continue to stay the same. Like in the past, the fund will not follow any pre-specified style (growth or value), which means it will continue to be style

agnostic. The emphasis on sustainability of growth rather than flashier momentum plays also continues. The intent is to identify companies with strong business models, durable competitive advantages, and quality management, which is typical of Franklin’s style of investing.

The investment team has consistently practiced its brand of research-oriented, long-term investing quite successfully over the years; and to that extent, it helps the manager in the management of this fund. Having been at the helm for over three years now, Reddy has displayed the potential to successfully execute this strategy over the long term. His extensive research experience aids him in his job. We are fairly impressed with his disciplined investment approach and believe that it should hold the fund in good stead.

Having said that, while Reddy has managed to stabilise the fund, we would like it to display better consistency over the long term.

  • Fund: Nippon India Vision
  • Fund Manager: Meenakshi Dawar, Sanjay Doshi
  • Star Rating: 1 star
  • Analyst Rating: Neutral
  • Date of Analysis: October 2019
  • Analyst: Kavitha Krishnan

This fund was previously run as a benchmark-agnostic high-conviction concentrated strategy that invested in two or three meaningful sectors with a long-term view. The fund recently saw a change in its mandate as well as leadership, and we think that the strategy is still coming together. Erstwhile manager Ashwini Kumar managed this fund for over 16 years before handing over management responsibilities to Meenakshi Dawar and Sanjay Doshi in May 2019. Following the change in mandate, the fund is now being anchored to its benchmark (IISL Nifty Large Mid Cap 250 TR) and aims to have diversified exposure across sectors. This change is designed to reduce the volatility that stood out as a characteristic of the fund in its previous avatar.

The managers aim to invest in high-quality stocks that are scalable and capable of growing faster than the overall sector. The benchmark aware approach leads to a portfolio that has exposures across stocks and sectors, thereby reducing concentration risks in the portfolio. Stock selection continues to be based on a bottom-up process, while sector selection and market-cap allocation are based on a top-down approach. Sector allocations are typically aligned to the benchmark, and the market-cap allocation typically depends on the manager’s views and availability of ideas.

The fund’s flexible approach and the manager’s ability to move into the small- and mid-cap space whenever required should give the managers added flexibility and the opportunity to generate additional alpha. The fund currently carries a mainly large-cap bias with top 10 holdings constituting about 40% of the fund.

The managers tend to take a two- to three-year view on companies and are currently focusing on a large-cap orientation for this fund based on their expectation of growth in this segment. Having said that, we think that it’s still a work in progress, and it’s important to take a long-term view on how the strategy is executed.

We think the fund could be a good choice for investors who prefer a low-risk strategy with consistent returns. Having said that, it’s important to look at the execution of the strategy under its new mandate.

  • Fund: SBI Large & Midcap
  • Fund Manager: Saurabh Pant
  • Star Rating: 4 stars
  • Analyst Rating: Neutral
  • Date of Analysis: October 2019
  • Analyst: Himanshu Srivastava

It was not the best of times when Saurabh Pant took over management of SBI Large & Midcap in September 2016, after its erstwhile manager Jayesh Shroff exited the fund company. The fund was going through a rough phase, and he had the task of bringing it back on track. Pant is an old hand at SBI. He joined the fund house in May 2007 as a research analyst and took over the reins of SBI FMCG Fund in June 2011. However, this fund is his first foray into managing a diversified equity fund.

There have been a series of changes in the fund over the past three years. After taking over, Pant restructured its portfolio to bring it in line with his investment approach, which was strikingly different from his predecessor. While Shroff used to run the fund with a growth-oriented approach, Pant is more valuation-driven.

The fund went through another round of restructuring after SEBI’s guideline on fund categorisation came into effect, resulting in a change in its broader investment framework. While earlier it was run with a flexicap approach, it is now a part of a defined large- and mid-cap category, where the funds must invest at least 35% of assets each in large- and mid-cap stocks.

Also, it is pitched against a different peer set, among whom it must establish its credentials afresh. Pant’s investment style is on the aggressive side as he prefers investing in an unbiased fashion. He tries to capitalise on short-term opportunities in the large0cap space, albeit in a constrained manner. The investment approach is benchmark-aligned with set deviation ranges across sector and stocks. However, Pant does not shy away from utilising the entire deviation range.

With a slightly restrictive investment proposition, benchmark-conscious approach, and relatively aggressive investment style with a value tilt, the strategy is multilayered. Therefore, its success depends on the manager’s execution capabilities. Though Pant has been able to stabilise the portfolio, the execution of the strategy has a scope for improvement. We are yet to build confidence in the strategy’s long-term viability and Pant’s ability to deliver better peer-relative results.

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Arpan Mukhopadhyay
Nov 24 2019 09:09 AM
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