The Hindu Business Line : MF portfolios with large-caps limited to few hundred stocks

Varied approach
Equity fund focused on large-caps invests in heavyweights without leaving much room for others
Funds focused on mid-, small-cap stocks are far broader in approach

Kolkata May 14 For all the variety that exists in the equity funds domain, there remains an enormous degree of commonality among portfolios. Not more than a few hundred stocks, out of a few thousand listed companies, have made the grade, underlining the fact that the preferred lot is only a small fraction of the entire investment universe.

A look at recent portfolios suggests that fund managers have not been too adventurous even in their bid to diversify their holdings to the extent possible.

The result is clear: It is not easy to spot huge differences between two average portfolios.

Finding marked differences in portfolios made up of mainly large-cap stocks is difficult, according to fund houses, indicating that some divergence does exist in terms of mid- and small-cap stocks.

There are plenty of mid-caps that have merited their attention, it is felt.

Investment circles, however, consider the commonality as worth commenting on.

They also add that a fund manager's real challenge, in the current context, lies in identifying good mid- and small-cap plays - not large-caps that are relatively easy to choose.

Taking all categories of funds into consideration (both diversified and sector-specific), the entire set is probably not more than 900 stocks, according to an estimate informally worked out by distribution firm Plexus Management.

Of these, it is easy to spot the large-cap companies across portfolios.

An equity fund focused typically on large-caps is expected to invest in heavyweights without leaving much room for others.

Take, for instance, ICICI Prudential Growth, which, despite the 15 sectors it is spread over, is chiefly invested in the country's largest companies, in line with its objective.

Many of these, including its top holdings (Reliance, ICICI Bank, TCS, Bharti Airtel, Maruti, ITC and L&T), are constituents of the main indices, Nifty and Sensex.

In such a situation, stock selection can make a genuine difference, according to Mr Tushar Pradhan, CIO (Equities), AIG.

"The need for good stock-picking was never felt more strongly," he said, adding that funds now have to sift through a larger number of stocks, as the universe of listed companies has widened considerably.

Mid-, small-caps

A range of sectors has thrown up listed entities in recent times, some of the most recent ones being real estate, fashion/garments, hospitality, power equipment and media.

These have added to the diversity that already exists in the secondary market, made up as it is with a few thousand stocks.

Funds that are focused on mid- and small-cap stocks are far broader in their approach, said Mr S.N. Lahiri, Senior Vice-President and co-Head of Equities, DSP Merrill Lynch MF.

He referred to a recent survey that says that while most large-caps are driven by `macro-information,' it is `stock-specific information' that drives the others.

DSP ML MF's own micro-cap product, which aims to invest in not more than 40-50 stocks, will depend on such information, it is stated.

The under-researched nature of these stocks will not be such a major issue in future, sources said, adding that many of these will gradually become mainstream, especially when larger amounts of money start chasing them.

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