Mid cap funds outperform large and multi caps

By Morningstar |  06-04-21 | 

Mid cap funds category has delivered 93.25% over a one-year period. PGIM India Mid Cap Opportunities Fund has topped the chart with 124.57% return while the bottom performer Axis Mid Cap Fund has delivered 69.77% return over a one-year period, as on April 5, 2021. During the same period, the BSE Mid Cap Index is up 98.49%.

Over a one-year period, mid cap funds have outperformed most other categories of funds such as large cap, equity linked saving schemes (ELSS), and multi cap.

Mid Cap funds tend to be more volatile in comparison to large caps. Thus, investors should have a time horizon of at least seven years to gain from such funds. There are 28 actively managed mid cap funds on offer. Recently, some fund houses have launched passive exchange traded funds and index funds tracking the mid cap index.

Here are two mid cap funds reviewed by our analysts recently.

ICICI Prudential Mid Cap Fund

  • Star Rating: 2 stars
  • Analyst Rating: Neutral
  • Fund Manager: Priyanka Khandelwal & Prakash Gaurav Goel
  • Inception: October 2004
  • Return: 104.80% (1 year), 7.42% (3 year), 14.46% (5 year), 14.55% (10 year), 16.68% (since inception)
  • Analyst: Himanshu Srivastava
  • Date of Analysis: December 2020
  • Number of stocks: 69
  • Assets in top 10 holdings: 33%
  • Assets under management: Rs 2,297 crore
  • Fund Overview

Intensive research is integral to the investment approach. The investment philosophy is a combination of growth at a reasonable price with slightly more focus on growth. Prakash Gaurav Goel is flexible with valuations while investing. Therefore, he will not hesitate to buy a company even if it is expensive, provided it offers huge growth potential. At the same time, he won’t mind trimming exposure in a stock where valuation has breached his comfort level. 

Within the broader framework, the manager plies his own investment style to construct the portfolio. While picking stocks, he has set filtration criteria that a stock should meet to qualify such as corporate governance, opportunity landscape, market share winner or loser, and return on equity framework. He also checks whether the mid-cap company is competing against large cap or against similar size of companies. In his opinion, a mid-cap competing with large cap largely struggles. He prefers companies where the skin in the game is high, and those that, over the years, have tried to reduce their leverage.

The investment style is largely bottom-up, and Prakash Gaurav Goel doesn’t believe in taking cash calls. He is cognisant of the risks associated with this strategy and therefore prefers maintaining a reasonably diversified portfolio as it helps in keeping the liquidity in check. While investing in small-cap stocks, he typically scouts for opportunities that are not available in mid-caps. Here, he tries to ferret out companies that have good management, are long-term winners, and have the potential to become mid-cap. Large caps, on the other hand, provide liquidity support to the fund. Goel tries to keep special-situation buying very limited. It is an elaborate stock-selection and portfolio-construction process, but given the brevity of the track record, we would like to adopt a cautious stance here.

UTI Mid Cap Fund

  • Star Rating: 3 stars
  • Analyst Rating: Neutral
  • Fund Manager: Ankit Agarwal
  • Inception: April 2004
  • Return: 97% (1 year), 9.10% (3 year), 14.31% (5 year), 16.44% (10 year), 17.72% (since inception)
  • Analyst: Nehal Meshram
  • Date of Analysis: October 2020
  • Number of stocks: 69
  • Assets in top 10 holdings: 28%
  • Assets under management: Rs 5,045 crore
  • Fund Overview

The fund is positioned as a pure mid-cap fund with close to 85% of net assets invested in dynamic and well-managed medium and small-sized companies. The manager adopts a bottom-up approach while investing. As suitable ideas are identified, he builds the portfolio through more than one stock that will work in the long run. Hence, the liquidity and price risks associated with mid-caps are managed with a high degree of diversification.

The fund’s investment process is well-defined and follows a blend strategy with a growth tilt. The fund invests at least 65% of its net assets in companies ranked between 101st and 250th by market cap. It is positioned to benefit from the potential growth opportunity by investing in dynamic and well-managed medium size companies with high growth potential vis-à-vis their well-established peers. The fund’s broad strategy remains unchanged despite the change in the portfolio manager. While the fund continues to focus on a highly scalable business model, the emphasis is now more on companies having long-run growth.

Ankit Agarwal follows a bottom up approach while selecting stocks and focuses on companies that have a fair track record but are passing through a transitory weak operational phase. While investing in small- and mid-cap stocks, he focuses on management's track record, business model, and sustainability before making such investments. The risk/reward adjustment, through maintaining a well-diversified portfolio and disciplined investment approach, will help avoid some of the riskier companies from its investable universe. This would help the fund generate steady returns across market phases. The execution of the strategy has also been good so far, but we need to evaluate this over the longer period under the new manager’s leadership.

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