Fund managers are increasingly moving towards large-cap companies in preference to smaller players as the recent volatility in Indian stock markets has brought most front-line stocks down to attractive valuations.
An analysis of the total equity assets under management (AUM) of mutual funds shows that fund houses have been consistently increasing their exposure in large-cap firms with a corresponding fall in the share of mid-caps and small-caps.
According to data from Morningstar, a U.S.-head-quartered investment research firm, 69.25 per cent of the total AUM of equity and equity-linked savings scheme (ELSS) was invested in large-cap stocks in the month of October 2016, up from 65.45 per cent in October 2015 and 57.12 per cent in November 2013. As per the Association of Mutual Funds in India (AMFI), the umbrella body of fund houses, the total equity AUM of the industry is Rs.4.68 lakh crore as on September 30, 2016.
“Small and mid cap stocks and funds have done exceedingly well over the last two years,” said Kaustubh Belapurkar, Director (Fund Research), Morningstar Investment Advisers (India). “This has resulted in small/mid-cap funds receiving substantial new inflows,” he said.
“Fund managers though are slightly wary of the valuations and are using a more stock-specific approach when investing in small/mid cap stocks. Managers are also increasingly allocating more towards large cap stocks in their portfolios,” he added.
According to Morningstar, companies that fall in the top 70 percentile of the cumulative market capitalisation of all companies in Asia (ex-Japan) qualify as large-caps. For India, it defines large-cap companies having a market capitalisation of more than Rs.15,750 crore.
“The recent movement in the stock market has brought the valuations of large-caps to reasonable levels compared to those in the small and mid-cap space,” said Gopal Agrawal, Chief Investment Officer (CIO), Mirae Asset Global Investments (India).
Data from Bloomberg further corroborates the fall in valuation. Its estimated price to earnings (PE) ratio of the Sensex for 2017 is 14.47, down from the current 19.60. The price-to-earnings ratio for 2015 was pegged at 19.29.
(This article first appeared in The Hindu dated November 28, 2016)