The Hindu Business Line : Mid-cap funds

Funds that have stuck too strictly to the mandate of investing in mid-caps have found it difficult to weather the hurricane that hit the Indian market in 2008. While equity funds have all toppled from their highs, mid-cap funds have borne the brunt of the market crash in the equity fund category.

With mid-cap stocks suffering a significant de-rating, funds focussed on mid-cap and small-cap stocks have, on an average, shed 39 per cent since the beginning of 2008. But the poor performance is only to be expected, considering that the BSE Mid-cap and BSE Small-cap indices have declined by 40 per cent and 46 per cent respectively.

Reliance Growth, ICICI Pru Discovery and Sundaram SMILE were among the out-performers within the mid-cap category, as they contained their declines to 30-33 per cent.

Reliance Growth, the largest equity fund, with an asset base of Rs 4,700 crore, held significant levels of cash during this period, which may have helped arrest the fall. The fund, in any case, appears to favour emerging large-cap stocks, with about a third of its assets invested in stocks with a market capitalisation of over Rs 5,000 crore. ICICI Pru Discovery, on the other hand, remained almost fully invested in equity throughout the correction phase, but the focus on the pharma and FMCG sectors appears to have paid off.

Sundaram SMILE made a quick shift into cash in early 2008, which again limited the decline. The fund’s portfolio, in keeping with the Sundaram BNP Paribas Mutual overall strategy, has taken a more defensive tilt. About 50 per cent of the assets are invested in large-cap stocks and exposures have been enhanced in pharma and FMCG stocks.

Over a one-year period, Reliance Growth and Sundaram BNP Paribas SMILE have been the only mid-cap funds to manage positive returns, no doubt due to their willingness to shift to cash and large-caps as the tide turns.

Funds that have taken the hardest hit in 2008 include JM Small and Midcap, ABN Amro Future Leaders, Magnum Midcap and Magnum Emerging Businesses. JM Small and Midcap Fund has declined 46 per cent in 2008, wiping out earlier gains. The fund, which launched in April 2007, was among the top performers in its category in 2007. But its concentrated approach to stock selection made it more vulnerable to the meltdown in mid-caps.

ABN Amro Future Leaders and Magnum Midcap had a substantial exposure to small-cap stocks, with a market capitalisation of less than Rs 2,000 crore, which probably explains their significant underperformance.

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