The Hindu Business Line : Mid-cap funds: Huge value erosion

The year 2008 was bad for equity as an asset class. Irrespective of its market cap and fundamentals, almost every stock listed on the bourses bore the brunt of the bear onslaught (except perhaps, consumer non-durables). Growth sectors suffered the worst.

In such a hugely volatile market, when the BSE Sensex and CNX Nifty lost close to 54 per cent, several mid- and small-cap stocks lost two-thirds of their value.

The worst among the mid-cap lot suffered value erosion of 80 per cent, though the category average was still better than the BSE Midcap Index by five percentage points.

Funds such as ICICI Pru Discovery and HDFC Capital Builder, however, contained losses to minus 55 per cent. These funds were able to do so despite being fully invested in such a market.

Usually, in a bear rally, mid-cap funds recover faster than their large cap peers. However, in any correction following a rally, these stocks equally give up their values.

For instance, during the October correction, Magnum Midcap, JM Small and Midcap and JM Emerging Leaders lost 40-48 per cent. But in the bear rally, they recovered substantially, only to lose the same in the subsequent correction. Over a one-year period Magnum Midcap and JM Small and Midcap lost 72-80 per cent.

Mid-cap funds, though, were not all bad performers; they were able to beat the BSE Sensex and Nifty over a five-year time frame. The category average over this period outpaced both the bellwether indices by eight percentage points (17.6 per cent).

Sectors that dragged

Capital goods, construction, power and infrastructure were the ones that pulled down returns. That funds such as ICICI Pru Discovery and HDFC Capital Builder had lower exposure to construction and power stocks and higher exposure to pharma and banks could have helped them contain the loss.

Magnum Midcap and JM Small and Midcap on the other hand had higher exposure to capital goods, non-ferrous metals and construction that resulted in dragging down the overall returns.

In both cases, they had fully invested in equity; this could also partially explain the losses. In some cases funds that moved to higher cash levels were able to contain losses better.

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