WhiteOak mutual fund’s Midcap and Tax-saver schemes NFO: Should you invest?

Kumar Shankar Roy |BL Research Bureau | Updated on: Aug 23, 2022

Both these mutual funds would look to deliver in categories where the majority of peers lag benchmarks

WhiteOak Capital Mutual Fund has announced the launch of two new fund offers (NFOs)—WhiteOak Capital Mid Cap Fund and WhiteOak Capital Tax Saver Fund.

While the NFO for the Mid Cap fund closes on August 30, the Tax Saver Fund NFO will continue till September 23. Both these categories i.e. Mid Cap (26 schemes) and Tax Saver (39) have many established schemes.

However, with about 70 per cent of their actively-managed peer funds lagging respective benchmarks over three- and five-year periods, there is a scope to generate alpha (excess returns over the benchmark) and gain investor interest. Will that happen?

Who is WhiteOak MF?

WhiteOak Capital AMC is part of WhiteOak Group, which manages ₹42,500 crore ($5.4 billion) of assets under its advisory. WhiteOak Capital Group was founded by Prashant Khemka, formerly CIO of Goldman Sachs Asset Management’s India Equity and Global Emerging Markets Equity businesses. In November 2021, White Oak Capital completed acquisition of YES Mutual Fund. The name of YES Asset Management was changed to WhiteOak Capital Asset Management from January 2022. WhiteOak is the latest entrant in India's highly competitive MF industry, where top-10 players control 80 per cent of assets.

WhiteOak Capital Mid Cap Fund

The scope of alpha creation is higher in midcaps, theoretically speaking, given that the segment is less researched compared to large-caps. For instance, an average 18 analysts cover midcaps compared to 24-30 for large-caps. Thus, in-house research capabilities matter a lot while identifying midcap winners.

WhiteOak says it has a large 30+ member investment team at the group level, covering nearly 1,000 stocks with more than ₹1000 crore m-cap. Large investment teams are also prevalent in some of the larger fund houses, but there is correlation between team size and fund returns.

Note that there is greater probability that a mid-cap slips to become a small-cap than transforming into a large-cap. Hence, investing in this segment requires greater research focus. Avoiding corporate disasters is important, too, as we have seen in sectors such as travel, housing finance, jewellery, services and even a private-sector bank. Hence, bottom-up stock picking assumes greater significance.

No particular style performs consistently every year. Likewise, sector and market cap performance keeps rotating year-on-year. So, WhiteOak believes that a balanced portfolio with a blend of factors can help improve consistency of the performance. Such an approach can better side-step prolonged cycles of out performance and underperformance. The fund will be benchmarked to S&P BSE Midcap 150 TRI.

In the existing midcap fund category, there are actively-managed 25 schemes, with 23 of them having at least three-year track record and 21 having at a least five-year track record. The biggest funds are HDFC Mid-Cap Opportunities, Kotak Emerging Equity, Axis Midcap, DSP Midcap and Nippon India Growth.

However, beating the NIFTY Midcap 150 Total Return Index has been tough for a majority of schemes. For instance, barely a third of the funds have outperformed the benchmark in three-year period and just 25 per cent have beaten the index in the five-year period. This shows two things. One, sticking to a passively-managed midcap fund would probably be a better bet for better returns. However, there are no passive midcap schemes with at least three year history. Funds such as Motilal Oswal Nifty Midcap 150, ICICI Pru Nifty Midcap 150, Nippon India Nifty Midcap 150 are yet to complete three years. Two, there lies a great opportunity for actively-managed midcap funds to deliver alpha given the poor situation on that front.

WhiteOak Capital Tax Saver Fund

This fund will be a classical open-ended Equity linked savings scheme (ELSS) and will have a statutory lock in of three years and tax benefits (under the old income tax regime). The ELSS fund will be benchmarked to S&P BSE 500 TRI.

The investment philosophy of the fund house is buying great businesses at attractive valuations. The portfolio construction approach can be divided into three stages: one, observe a broad universe where screening out of poor governance, avoiding weak characteristics are important. At the same time, staying alert to structural changes and looking for desired attributes in a company/business. Two, identifying and researching great businesses. Three, waiting until value emerges in the business and act when opportunity presents itself. Do remember this is not unique to ELSS fund, but to broadly all equity funds of WhiteOak.

The new fund house employs a proprietary, cash flow based ‘Opco-Finco’ analytical and valuation framework which, it says, provides different insights in contrast to accounting earnings based models.

It wants to remain style agnostic. Skewness to a particular style may increase portfolio volatility and can adversely impact portfolio performance on risk adjusted basis, as we have seen in many equity funds.

In both the midcap fund and ELSS fund, Ramesh Mantri (Equity), Piyush Baranwal (Debt) and Trupti Agrawal (overseas investments) are designated fund managers.

The scope of delivering alpha exists in ELSS category. Out of 35 ELSS funds with three year history, only 25 per cent were able to outperform their respective benchmarks. The number drops to 20 per cent in the five-year timeframe. The biggest/well-known ELSS funds include Axis Long Term Equity, ABSL Tax Relief 96, Mirae Asset Tax Saver, Nippon India Tax Saver and SBI Long Term Equity.

What should investors do?

WhiteOak runs PMS and AIF products for high networth investors. The MF products are its first retail offerings. While the PMS and AIF products have seen good investor interest on account of their returns, the house is starting MFs on a clean slate.

It remains to be seen how WhiteOak outperforms and the sustainability/quality of those returns. If performance indeed shows promise, investors can consider adding them later.

Published on August 23, 2022
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