The Hindu Business Line : Sundaram BNP Paribas Select Midcap Fund: Hold

Investors can continue to hold the units of Sundaram BNP Paribas Select Midcap Fund (Sundaram Midcap), considering its long-term track record in generating returns. The fund has delivered an annual return of 42.1 per cent over a five-year period, placing it only below one fund (Reliance Growth) in the midcap category.

Sundaram Midcap has consistently bettered its benchmark — the BSE Mid Cap — over one-, three- and five-year periods. The fund has participated well in the market rallies of the last few years by delivering returns better than its benchmark. But it may not contain downsides if there is a prolonged broader market slump.

The fund is suitable for investors looking to diversify their fund portfolio with midcap exposure. But with midcap stocks, the risk of earnings uncertainty, especially in a high interest rate environment and rough macro environment, is heightened.

Performance: Sundaram Midcap is one of the few midcap focussed funds that has a five-year track record. Over the last three-five years, the fund’s returns have been in the top three of this category, bettering peers such as Birla Sun Life Midcap, Magnum Global and HDFC Capital Builder. The fund may not substantially beat its benchmark during market rallies, such as Reliance Growth or IDFC Premier Equity might.

During the market slumps of 2004, 2006 and this year, the fund has marginally contained downsides better than its benchmark.

Sundaram Midcap may be suitable for investors with a three-four year investment horizon for superior returns. In the short run, the fund’s returns may match that of its benchmark. With midcap holdings, periodical blips result due to execution delays, rising interest costs and an economic slowdown remains a threat.

Strategy: Sundaram Midcap takes exposure in a large number of stocks in order to diversify. But sector diversification is not as pronounced. The fund has reduced the number of stocks in the portfolio over the past year. From over 100 last year, the number of stocks is only 64 in the August 2008 portfolio.

The large number of stocks may explain the moderation in returns during market upswings, though concentrated exposure to momentum sectors may have kept it going. Midcap stocks (less than Rs 10,000 crore market cap) that accounted for close to 90 per cent of the portfolio last year is now at 68 per cent.

The fund has also moved significantly into cash, which stands at 19 per cent of the portfolio. This suggests that the fund may be taking a defensive approach till the market recovery becomes pronounced. Finacial Services, capital goods and construction stocks that were the toast of the past year are still in the top few sectors held.

Fund Facts: The NAV per unit of the growth option is Rs 94.3. Mr Satish Ramanathan manages the fund.

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