BNP Paribas Midcap: Buy

Mid-cap stocks have had a fantastic run in the last one year, with the BSE Midcap index gaining 77 per cent, much higher than the Sensex’s 44 per cent run-up in this period.

Most stocks in the mid-cap space have galloped based on expectations of higher growth; but the party may not be over yet.

As a pick-up in execution, volumes and profitability show up on the ground with the recovering economy, the deserving amongst the mid-caps may still be re-rated based on improved earnings visibility. The BNP Paribas Midcap fund is a good choice to play this line of thought.

The current portfolio has a basket of several quality mid-cap plays such as IRB Infrastructure, Persistent Systems, Kajaria Ceramics, Fag Bearings, Sobha Developers, Balkrishna Industries, PVR, Jyothy Labs, MindTree and VA Tech Wabag. The fund also seems keen on tempering risks and differs in its style from what a normal mid-cap scheme does.

Throughout the rally in the last one year, it has consistently held about 50-55 per cent of its equities investments in large-cap stocks (stocks with market capitalisation of ₹7,500 crore and above). It never went overboard on cyclical stocks for most part of the year, holding only about 2-3 per cent in sectors such as industrial products, construction and engineering.

The fund has increased allocations to defensive sectors such as software and pharma in the last two months. This inclination towards conservatism works well in the current scenario, when the markets are touching new highs each day. It will help the fund withstand volatilities better, in case growth takes longer than expected to recover. BNP Midcap hence suits those investors preferring a more cautious option among mid-cap funds, to limit downside risks.

It is perhaps due to its guarded approach that the fund clocked only about 82 per cent gains in the last one year.

Top performing mid-cap funds such as Franklin Smaller Companies, ICICI Pru Midcap and Mirae Emerging Bluechip clocked 100-120 per cent gains. But this return is still better than others such as IDFC Premier Equity.

BNP Midcap is among the top 10 diversified funds, both over three- and five-year periods.

The fund has also outdone its benchmark, the CNX Midcap index, by 11-13 percentage points over one-, three- and five years.

It sports a one-year rolling return of 98 per cent in the last five years, pointing to consistency in performance. The fund normally does not take concentrated exposures to individual stocks, limiting its holdings in any one of them to less than 5 per cent.

Banks and software are the top sector choices for the fund currently. It has increased exposure to segments such as cement and telecom in the last three months, betting on stocks such as Idea Cellular, Bharti Airtel, Orient Cement and JK Cements.