Large-cap funds survive the rout

PARVATHA VARDHINI C. | Updated on March 12, 2018



If your New Year resolution in 2013 was to invest in equity mutual funds and you went by it, luck may not have been on your side. Diversified equity funds, as a category, clocked an average loss of 9.2 per cent in the first nine months of 2013, contrary to the sprightly returns they raked in during the same period in 2012.

Equity funds on an average also fared worse than the broader markets, represented by the CNX/BSE 500 indices which declined 8.2 per cent.

But don’t lose heart; not all funds took a beating. At least 80 of the total of about 170 funds in the diversified category, that is, almost one in every two funds contained losses better than the broader markets.

Better still, 10 of these funds have actually shown positive returns of 0.5-3 per cent. So, what kind of funds managed to make a mark in this season of market volatility? Considering that these have weathered the gyrations well, are they the ones you should opt for, for your long-term portfolio?

Safety in large-caps

2012 was a year of hope — hope that a gradual reduction in interest rates and that the reform measures initiated to put the economy back on track, would indeed fuel economic growth.

This led to a rally in mid-cap stocks. And mid-cap-oriented funds became the biggest gainers that season.

But as the year ended, hope gave way to despair and investors in 2013 took safety in large-cap stocks.

In troubled times, these stocks tend to provide stability and greater visibility to earnings growth. Reflecting these sentiments, the Sensex and the Nifty lost only about 1 per cent and 3.6 per cent, respectively, compared with the 8.2 per cent fall in the BSE/CNX 500 indices.

Mirroring this, large-cap funds are among the best performers this year, with funds such as Axis Equity, BNP Paribas Equity and Religare Invesco Equity finding a place among the top 10. These funds have gained 0.5-3 per cent in their Net Asset Values for the nine-month period.

A combination of good stock and sector choices, for example, has helped Axis Equity deliver. Since January 2013, the fund has been quick to reduce holdings in the trouble-ridden banking space and latch on to software stocks.

Consistent holdings in large-caps such as Dr Reddy’s, ITC, TCS and Sun Pharma also helped the fund.

Besides, its tendency to find safety in cash/debt holdings during times of market volatility propped up returns. It held about 85-90 per cent in equities during this period. A similar focus on blue chips along with the ability to shift deftly between equity, debt and cash saw ICICI Pru Dynamic join the top 10. Birla Sun Life India Opportunities has earned 6.3 per cent returns in this period.

Mid-caps down but not out

Contrary to large-cap oriented funds, mid-cap funds took a solid blow this year. About 90 per cent of the funds in this category lost much more than the BSE/CNX 500 indices.

Funds such as Kotak Midcap, Kotak Emerging Equities, HSBC Midcap, DSPBR Small and Midcap and SBI Emerging Businesses are among the laggards, placed in the last quartile of diversified funds. These funds have lost 20-28 per cent.

But there are a few men among the boys in HDFC Capital Builder, Franklin Smaller Companies and BNP Paribas Midcap.

These funds have managed to restrict losses in their NAVs to 5-7 per cent, bettering the broader indices.

Franklin Smaller Companies has been able to achieve this feat thanks to superior picks in the mid-cap space’, such as Amara Raja Batteries, MindTree and Federal Bank.

What has aided HDFC Capital Builder, though, is its tendency to hold a generous dose of large-cap stocks, compared with other mid-cap funds.

Themes that worked

Two other funds that appear in the top 10 surprisingly tell us about a theme that was bruised left, right and centre — banking. Well, Tata Ethical and Taurus Ethical, both Sharia-compliant funds, avoid lenders (read banks and finance) by mandate, and this gave their returns a big leg-up.

These are among the top ten performers in the first nine months of this year. From being winners in 2012 on expectations of a peaking out of the interest rate cycle and improvement in credit offtake, the banking index declined 24 per cent in the first nine months of 2013.

Sagging economic growth and burgeoning bad loans routed banking stocks. Almost all the banking sector funds lost more than these indices.

The stodgy but tried-and-tested defensive stocks did provide cushion this year, with funds focused on sectors such as pharma and FMCG continuing to do well.

While FMCG, as a theme, raked in handsome returns in the last two-three years, both ICICI Pru FMCG and SBI FMCG have gained only about 8-9 percentage points, much lower than the 15 per cent returns by their benchmark in 2013.

One defensive theme that didn’t work too well was picking up high dividend yielding stocks. More so because investor risk appetite has been low going by the preference for large-cap stocks.

Only BNP Paribas Dividend Yield and Tata Dividend Yield have contained losses better than the broader market indices.


Published on October 19, 2013

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