Mutual Funds

Why it’s a good time to exit SBI Magnum MidCap Fund

Maulik Madhu BL Research Bureau | Updated on August 14, 2021

The scheme has been a long-term underperformer in mid-cap fund space

Partly recouping the loss in the early part of last week following BSE’s announcement on curbing excessive stock price movement, mid-cap and small-cap indices closed the week 1-2 per cent lower. Last week’s loss aside, the Nifty Midcap 150 TRI has gained 70 per cent over the last one year.

Investors can use this opportunity to redeem their investments in underperforming mid-cap and small-cap funds. SBI Magnum MidCap Fund is one such long-term underperformer in the mid-cap fund space. In line with the market rally, it has generated a return of 75 per cent over the past year, providing a good exit opportunity.

Low downside protection

Going by last seven years’ data, the mid-cap fund category has generated 3-year and 5-year average rolling returns (CAGR) of 10.5 per cent and 10.4 per cent, respectively. During the same period, SBI Magnum MidCap has generated respective average returns of 8.1 per cent and 8.3 per cent. Compared to this, category topper Axis Midcap has offered 13.4 per cent and 13.1 per cent on average, respectively, over the same period. Only schemes that have been in existence for at least seven years have been considered.

SBI Magnum MidCap’s below-average returns are likely a result of its low downside protection — reflected in the scheme’s higher instances of negative returns compared to several peers. Over the last seven years, the scheme has generated negative 3-year returns 21.7 per cent of the time versus 8.8 per cent for the mid-cap fund category. Similarly, 5-year returns have been negative 5.6 per cent of the time compared to only 0.5 per cent of the time for the category.

Overall, while SBI Magnum MidCap has managed to capture market upsides relatively better than many others in the category, it has failed to contain the downsides. The scheme has had a larger exposure to small-caps and smaller exposure to large-caps compared to many peers. As of July-end 2021, the scheme held around 66 per cent of its assets in mid-caps (versus 69 per cent for the category), 24 per cent in small-caps (versus 16 per cent), 3 per cent in large-caps (versus 12 per cent) and the rest in cash and cash equivalents.

The scheme’s downside capture ratio (DCR) of 91 per cent with respect to the Nifty Midcap 150 TRI over the last seven years is significantly higher than that for the top performers — 68 per cent for Axis Midcap Fund and 84 per cent for DSP Midcap Fund. The DCR indicates the extent to which the scheme NAV has fallen compared to the benchmark index in bear market periods. The lower the DCR, the better.

Strategy and performance

Last three years’ data shows that on average, SBI Magnum Midcap has invested 68 per cent of its assets in mid-cap stocks. Another 25 per cent has been allocated to small-caps. Large-cap stocks and cash have accounted for the remainder. Sector-wise, finance, industrial products, consumer goods and pharmaceuticals have been among the top sector holdings in the past. As of July-end 2021, industrial products, automobiles, finance and consumer goods accounted for 49 per cent of the scheme assets.

In the mid-cap rally of 2017, while the Nifty Midcap 150 TRI gained 66 per cent, SBI Magnum MidCap rose 41 per cent (December 2016 to January 2018). Peers such as Axis Midcap and DSP Midcap rose 48-49 per cent during this time.

High exposure to pharmaceutical stocks and almost no exposure to automobile stocks during a large part of this period were among the likely contributors to SBI Magnum MidCap’s underperformance. Price erosion in the highly competitive US generic drugs market and USFDA-related regulatory issues bore down on the pharmaceutical sector in 2017. But the Indian auto industry put up a strong show in 2017-18 with segments such as commercial vehicles, three-wheelers and two-wheelers registering double-digit domestic sales growth of 15 to 24 per cent that year.

Then, during the February to March 2020 fall, SBI Magnum MidCap declined 37 per cent in line with the 39 per cent fall in the mid-cap index. Peer funds from Axis Mutual Fund and DSP Mutual Fund witnessed a fall of 29 to 32 per cent.

Other options

For investors whose mid-cap exposure has gone beyond their initially intended allocation, an exit from SBI Magnum MidCap can provide an opportunity to pare the exposure.

Those who would like to maintain their current exposure to mid-caps can consider making a switch to the category top performer Axis Midcap. DSP Midcap and Nippon India Growth are a few other choices.

Axis Midcap’s relatively higher exposure to large-caps and lower allocation to small-caps has offered protection in periods of mid-cap underperformance. As of July-end 2021, the scheme held 24 per cent and 2 per cent, respectively in large-caps and small-caps. Correct sector bets in the past, such as low allocation to pharma stocks and higher to auto stocks in 2017-18 paid off well for the scheme.

Published on August 14, 2021

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