3 Neutral and Bronze mid-cap funds

By Kavitha Krishnan |  16-09-20 | 
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About the Author
Kavitha Krishnan is a Senior Research Analyst on Morningstar's Fund Research team. She has over 9 years of experience in the Financial Sector. She would like to hear from you, but cannot give financial advice.

What is a mid-cap stock?

According to the Securities and Exchange Board of India, or SEBI, the first 100 companies in terms of full market capitalisation are large caps. The companies that are ranked 101-250 are mid caps, and the 251st company onwards comes under small-cap companies.

A mid-cap fund must maintain a minimum of 65% of its portfolio in mid-cap stocks.

Here we look at three such funds.

Aditya Birla Sun Life Mid Cap

  • Star Rating: 1-star
  • Analyst Rating: Neutral
  • Annual Performance: From 2016 to 2019, the fund slipped from second quartile performer to a bottom quartile performer
  • 5-year trailing return: 4.98% annualised
  • Fund Manager: Anil Shah has been managing this fund since May 2020
  • Date of Analysis: September 2020
  • Brief analyst note on the fund

Shah focusses a lot on the top-down and macro factors that govern the markets. Shah uses a combination of top-down sector selection and bottom-up stock selection to generate alpha. He looks at investing in themes that are expected to play out over a 3- to 5-year horizon and remains invested in a sector/stock until their investment thesis plays out.

Shah pays heed to portfolio construction and liquidity when building the portfolio. He runs a fairly diversified portfolio, with the July 2020 portfolio reflecting about 65 stocks. Top 10 holdings account for roughly 30% of assets, with the fund tending to hold a significant level of off-benchmark positions. His investments in stocks like Coromandel International, Mahindra CIE Automotive, Sanoi India, and Pfizer typify a few of his off-benchmark investments. On the other hand, the fund does not hold stocks simply because they are a part of the benchmark. Benchmark heavyweights like Info Edge, Berger Paints, and Bajaj Holdings Page Industries don’t feature in the manager’s July 2020 portfolio.

The fund’s portfolio as of July 2020 reflects an overweight position in the materials and industrials sectors. He also holds some exposure in the utilities and energy sectors owing to his off-benchmark positions in stocks like Gujarat State Petronet and Mangalore Refinery & Petrochemicals Ltd.

Kotak Emerging Equity

  • Star Rating: 3-star
  • Analyst Rating: Bronze
  • Annual Performance: Between 2016 and 2019, it has been a top quartile performer, a second quartile performer and a third quartile performer
  • 5-year trailing return: 10.43% annualised
  • Fund Manager: Pankaj Tibrewal
  • Date of Analysis: July 2020
  • Brief analyst note on the fund

The manager typically buys into stocks at a fairly low exposure and builds positions based on the company’s visibility of growth. Having said that, the portfolio includes at least 20-25 stocks with weightings below 1%.

The portfolio reflects Pankaj Tibrewal’s long-term views and allows him to take active sector bets within the fund’s specified internal limits. He aims to reduce stock-specific risk by running a diversified portfolio of about 55-70 holdings.

The manager looks for growth businesses with strong entry barriers and sustainable competitive advantages such as brand name, business capabilities, and/or market shares that generate steady cash flows, have capable management teams, and trade at reasonable valuations. Corporate governance and liquidity also play a key role in his portfolio. He combines absolute and relative valuation measures to determine the fair value of stocks and invests based on a stock's intrinsic value, valuations versus industry peers, and historical valuations.

The fund’s portfolio has been positioned to gain advantage of leverage and growth in the domestic economy. Basic materials, consumer cyclicals, and industrials have historically constituted a major portion of the portfolio. Financials has remained an underweighting, mainly owing to the fund’s underexposure to NBFC’s and PSU banks.

Axis Midcap

  • Star Rating: 5-star
  • Analyst Rating: Neutral
  • Annual Performance: A top-quartile performer in 2012, it slipped to the bottom quartile for 3 years (2015-17) and over the past 2 years has been a top quartile performer again
  • 5-year trailing return: 11.08% annualised
  • Fund Manager: Shreyas Devalkar since November 2016
  • Date of Analysis: May 2020
  • Brief analyst note on the fund

The portfolio reflects Devalkar’s high-conviction ideas and has a distinct character. Having said that, there is a lot of focus on liquidity and tradability of underlying stocks. The stock-selection process results in a benchmark-agnostic portfolio that typically shares a very low overlap with the S&P BSE Midcap TR Index.

He invests in high quality stocks with long-term sustainable growth prospects. The portfolio remains markedly different compared with peers and its benchmark, owing to the quality of stocks that fit into their portfolio. The manager evaluates firms based on their fundamentals, growth trajectory, corporate governance, financials, and so on. He places a lot of focus on corporate governance, which could lead him away from some firms despite their higher growth trajectory. The manager chooses stocks based on the PEG ratio as opposed to the company’s P/E ratio. He wants to identify firms with sustainable earnings growth potential and a credible management. The manager places a lot of focus on the promoters and undertakes a 360-degree approach while evaluating a company by ensuring thorough channel checks are put into place.

From a financial standpoint, they look for companies with lower capital gearing and strong balance sheets. The research team runs a model portfolio, which is a combination of their best ideas and is run based on a three- to five-year view of stocks. Overall, we think the investment process is well thought out.

© 2020 Morningstar. All rights reserved. The Morningstar name is a registered trademark of Morningstar, Inc. in India and other jurisdictions. Research on securities, referred to for the purpose of this document as “Investment Research”, is issued by Morningstar Investment Adviser India Private Limited, which is registered with SEBI as an Investment Adviser (Registration number INA000001357), providing investment advice and research, and as a Portfolio Manager (Registration number INP000006156). For the complete disclaimers, click here.

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