5 Large and Mid Cap funds to consider

By Kaustubh Belapurkar |  18-11-20 | 
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About the Author
Kaustubh Belapurkar, Director of Manager Research, Morningstar Investment Adviser India.

Large and mid-cap funds are diversified equity funds that invest a minimum 35% in large-cap stocks and 35% in mid-cap stocks. Over and above this is up to the fund manager’s discretion. Hence, the ratio between large and mid-cap companies might differ from fund to funds.

These funds are positioned on a higher risk spectrum as compared to pure large caps and but not as risky as pure mid caps.

Morningstar’s fund analysts reviewed these funds in this calendar year.

Mirae Asset Emerging Bluechip

The fund was historically positioned true to its small- and mid-cap orientation, and has recently moved into the newly defined large- and mid-cap Morningstar Category with minor changes in the fund features. The portfolio has not changed considerably, as it always maintained 30% in large caps for reasons like improving fund liquidity and the former benchmark's 40% stake in large caps. The team believed that investment should be based on the merit of the underlying business: Growth, management quality, and size of the company should not deter the decision.

It is a well-diversified portfolio of around 60-65 stocks. The manager avoids compromising on liquidity; hence, with the fund's increasing size, it is closed for lump-sum investments and has also restricted investments through SIP only once a month with an upper cap of INR 25,000. The fund remains fully invested and avoids churning the portfolio often, reflected in the fund's lower turnover ratio relative to peers. The fund has a bias for the financial services, consumer defensive, industrials, and healthcare sectors. Notably, there has been no exposure to real estate and construction, as these businesses do not have high cash flows and returns on capital employed.

Franklin India Equity Advantage Fund

  • Fund Manager: Lakshmikanth Reddy
  • Star Rating: 2 stars
  • Analyst: Himanshu Srivastava
  • Analyst Rating: Bronze (Direct), Neutral (Regular)
  • Date of Analysis: September 2020
  • Performance, Portfolio, Fund Analysis

The change in the fund’s investment mandate in 2018 has changed its nature, portfolio construction, and probable outcome. While earlier, the manager plied a fluid investment style with regards to allocation in large, mid or small cap stocks; now, as per the investment norms of ‘large and mid-cap’ category, at least 35% of assets is to be maintained in large and mid-cap stocks respectively, thus limiting manager’s degree of freedom to that extent. Consequently, Lakshmikanth Reddy restructured the portfolio and increased mid-cap exposure.

The other aspects of the portfolio construction remain consistent. Within the defined framework, Lakshmikanth plies a fluid investment style while constructing the portfolio. For instance, correction in mid-cap stocks since 2018 has prompted him to venture deep into this segment in search for attractively valued mid-cap names having good prospects. As a result, they now account for almost half of the portfolio. Currently, while two thirds of the portfolio has growth characteristics, one third has value characteristics. The manager has positioned the portfolio to benefit from the economic turnaround and post-coronavirus scenario, with significant positions in cyclicals such as wholesale banks, auto and auto ancillary, hotels, and stocks dependent on the real estate sector. The portfolio has significant exposure in public sector undertaking utilities where there is tremendous value.

DSP Equity Opportunities Fund

  • Fund Manager: Rohit Singhania
  • Star Rating: 3 stars
  • Analyst: Himanshu Srivastava
  • Analyst Rating: Bronze (Direct), Neutral (Regular)
  • Date of Analysis: June 2020
  • Performance, Portfolio, Fund Analysis

Rohit Singhania implements an unconstrained, benchmark-agnostic approach without any bias towards a stock or sector while constructing the portfolio. He manages the fund with a rather aggressive style, which entails churning the portfolio frequently to capitalise on investment opportunities arising in the interim. He will therefore not hesitate to increase or reduce allocations swiftly in response to rising and falling stock prices. Additionally, he believes in buying and selling huge amounts to make a meaningful difference in the portfolio. He typically scouts for investment opportunities in large-cap names where he sees any trend emerging with regards to (for instance) cash flows or ROE. The mid-cap portion of the portfolio is relatively stable in line with his belief that they need more time to deliver, which necessitates a longer investment horizon. Singhania constructs a diversified portfolio, and taking high cash exposure is not a part of the strategy.

While an unconstrained process can be very rewarding; it is risky, too. A wrong bet can lead to significant underperformance. Also, the absence of a rigidly defined method means investments are made on a somewhat intuitive basis. Hence, it must be noted that the success of the investment process largely depends on Singhania’s execution skills. Since he took over the fund, he has been in control of the process.

Kotak Equity Opportunities Fund

The portfolio reflects Harsha Upadhyaya’s long-term views and allows him to take active sector bets within the fund’s specified internal limits. He aims to reduce stock-specific risk by running a diversified portfolio of about 55-65 holdings. Internal limits place some restraint and lead to benchmark heavyweights featuring in the portfolio. While this protects the portfolio from significant underperformance during down markets, it could also constraint the upside slightly. Top 10 stocks account for about 40% of assets in line with the large-cap category average. The fund’s buy-and-hold approach is reflected in its low turnover and long-term view on the stocks that they invest in.

Upadhyaya favors growth companies having sustainable competitive advantages such as brand name, business capabilities, or market share that generate steady cash flow, have capable management teams, and that trade at reasonable valuations. Upadhyaya combines absolute and relative valuation measures to determine the fair value of stocks. He invests based on a stock's intrinsic value, valuations versus industry peers, and historical valuations. The top-down approach is not entirely ignored, as Upadhyaya over/underweights sectors based on their growth prospects and relative valuations compared with the broader index and itself on a historical basis. Although stock picks in the small/mid-cap space are largely a residual of bottom-up stock-picking, Upadhyaya also uses relative valuations between large caps and small/mid-caps to over/underweight the same. Upadhyaya also considers downside risk, corporate governance, and liquidity while building the portfolio.

ICICI Prudential Large & Mid Cap Fund

The managers follow a disciplined investment process with a mix of value and growth styles. With a large-cap bias, they evaluate sectors from a top-down perspective, favouring those with attractive fundamentals and shifting away from ones where they think valuations are stretched. Within the sectors, they use relative valuation parameters to invest in stocks that are attractively priced relative to their growth prospects. Companies favoured by the investment process typically display quality management, strong financial strength, and growth prospects. The resulting investment style can be best characterised as having a slight growth tilt. Considering Sankaren Naren’s style of investing, it isn't uncommon for him to trade aggressively and buy/sell stocks from the same sector based on relative valuations. With the fund's countercyclical approach, he looks to safer stocks during the turmoil, and as the sector outlook improves, he moves into riskier stocks.

We believe that as long as Naren helms this fund, he can make the process work. But given that Prakash Goel manages a significant allocation to mid-cap stocks, which are relatively risky, it could witness a big decline in returns if not picked up carefully. Hence, with no apparent advantage on its approach and execution, the Process rating is downgraded to Above Average from High.

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Suleiman Haq
Nov 23 2020 04:52 PM
 Why nothing on Canara Robeco Emerging Equities fund. It is the topmost fund of the category
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