Sundaram Select Midcap: Hold

Unit holders of Sundaram Select Midcap (Sundaram Midcap) can hold their investment in the scheme based on its ability to beat its benchmark BSE Mid Cap across market cycles.

Fresh exposures, though, can be avoided for now, given the fund's lacklustre performance compared with top mid-cap peers.

The fund delivered 9.5 per cent and 6.9 per cent, respectively, over a three- and five-year period, outpacing its benchmark by over five percentage points. While this performance is better than broad market returns, over a three-year period, more than half a dozen funds delivered twice the returns of Sundaram Midcap.

Over a three-year period, although stock markets remained highly volatile, the category average return of mid-cap funds was eight percentage points higher than the CNX Nifty, demonstrating the ability of mid-cap funds to outperform by a good margin even during volatility. This means that most mid-cap funds, such as Sundaram Midcap, have managed to combat volatility well this time around, unlike the 2008 market rout.

Sundaram Midcap's performance in any ensuing market rally will prove whether it manages to catch up or outperform peers in an upmarket.

Performance

Investments through SIPs in Sundaram Midcap delivered higher returns than lump sum investing over various time periods. This suggests that the fund's NAV is quite vulnerable to market swings.

The fund performed exceedingly well by taking aggressive calls on stocks till 2006. It was ranked in the top ten list of mid-cap fund performance chart then.

The fund took focussed sector bets earlier but ensured diversification by holding large number of stocks in its portfolio. Now, its focus is spread over more sectors, albeit limiting the total stocks in the portfolio. In the process, the fund appears to have lost out on its edge to generate far superior returns to the market.

Barring 2009, the fund has been struggling to retain a place in the top quartile of the mid-cap fund universe in the last three years.

Like most other midcap funds, Sundaram Midcap took a heavy beating in the 2008 market correction, falling 58 per cent that year. But in recent times, though, its less aggressive strategy helped contain declines better. Over a one-year period, it shed 11 per cent of its NAV against the benchmark loss of 16.4 per cent.

The fund managed to contain the losses better than its benchmark by going underweight on underperforming financial services stocks and taking higher exposure to consumer goods.

The fund also protected its portfolio during volatile phases by moving to cash. In recent years, whenever the CNX Nifty witnessed a fall of over 10 per cent, the fund typically moved over 10 per cent of its assets into cash. In fact, cash and cash equivalent accounted for as high as 16 per cent of its portfolio in February 2011. By doing so, it managed to contain the downside better than its benchmark but several peer funds managed far better performance during the same period without moving away too much from equities.

Being a mid-cap fund with a large asset base prevents the fund from being too nimble.

Portfolio Strategy

The fund held 59 stocks in its April portfolio. The top ten stocks accounted for 36 per cent of the assets. Barring few stocks, single stock exposure was limited to less than three per cent of the portfolio. Such a strategy would help the fund contain losses during volatile phases. But it may dampen its return during market rallies.

In the portfolio, consumer goods, financial and auto ancillaries received higher weights.The fund has taken a contrarian view on the beaten down financial sector and doubled its exposure in recent months.

In what seems a diversification strategy, the fund invested as high as 17 per cent of its assets in several sectors. In the past few years, the fund has been declaring decent dividends to book profits on market rallies.

The fund is managed by Mr Satish Ramanathan.

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