JM Financial Mutual Fund has launched a new equity scheme after a gap of over 14 years. The JM Midcap Fund’s new fund offering (NFO) — which closes on November 14, 2022 — will be the country’s 43rd midcap fund offering in a category that has over a dozen passive schemes. Given the already crowded segment, JM Midcap Fund’s work seems cut out.
Even with a higher likelihood of deriving multibagger returns, as compared to large-caps, actively managed midcap funds have been struggling to beat benchmarks of late, with over half of them under-performing across one-, three- and five-year periods. Does JM Midcap Fund have what it takes to outshine the rest?
Midcap investing basics
Midcap funds, as of September 30, 2022, managed over ₹1.8 lakh crore investor assets. The category has popular funds such as HDFC Mid-Cap Opportunities, Kotak Emerging Equity, Axis Midcap, DSP Midcap and Nippon India Growth. Midcap stocks, in general, have shown higher price appreciation compared to large-cap stocks. As a category, midcap funds have generated 12 per cent CAGR in a five-year period and 18 per cent CAGR in a 10-year period.
Studies have shown companies rarely leap-frog from mini/small-cap to mega/large-cap. A fair number of companies move from mini/small-cap to midcap and deliver supernormal returns. One of the most potent and focused hunting grounds for high-performing stocks is the midcap category — that is, 150 stocks with market-cap rank 101 to 250.
Midcap equity fund managers build portfolios with the hope that over the next few years a fair share of the midcap stocks they own (8-10 per cent strike rate) will cross over to the mega/large-cap category and deliver handsome returns. Data shows that of the 150 midcap companies in 2016, 12 such as Adani Enterprises, Muthoot Finance, Info Edge, Honeywell Auto and Biocon moved to mega/large-cap by 2021, delivering, on average, 34 per cent return CAGR. As many as 77 midcap companies stayed mid (16 per cent return CAGR) and 61 slipped to mini/small-cap category (-10 per cent return CAGR). This is also the risk.
Before JM Midcap Fund’s launch, we have seen nine rollouts within the last 12 months. While WhiteOak Capital Midcap and IDFC Midcap were launched in the actively managed space, the balance are passive funds including Tata Nifty Midcap 150 Momentum 50, SBI Nifty Midcap 150 Index, Axis Nifty Midcap 50
Five most popular stocks in mid-cap fund portfoliosThe 28 mid-cap funds put together have exposure to hundreds of domestic equity securities; here are also details of top ‘mid-cap’ buys and sells
Why midcaps now?
JM Mutual Fund appears bullish about signs of revival in the capex cycle, coupled with a slew of government initiatives, reduced corporate tax rates, and so on. The fund wants to have a bias towards growth stocks. Post correction, valuations have become attractive (NSE Midcap blended forward P/E valuations closer to long-term average).
According to JM MF, midcaps are more diversified as compared to large-caps. For instance, sectors with a secular growth trajectory (such as consumer discretionary, healthcare and industrials) constitute 44.2 per cent and 16.1 per cent of the Nifty Midcap 150 Index and Nifty 100 Index, respectively. Nifty’s concentration in 2-3 sectors makes it less diversified compared to the Midcap Index. New economy and higher growth sectors like QSR, pathological labs, AMCs and industrials are fairly represented in Midcap Index compared to Nifty.
New investors get into midcaps for higher returns. This is evident from point-to-point returns of Nifty Midcap 150 TRI being higher than Nifty 50 TRI across time horizons (see infographic below).