Equity markets are quoting strong and, given the 60-63% return delivered by the key mid- and small-cap indices, attention is moving towards this space. Since mid- and small-cap-oriented mutual funds suffered the most in the recent downturn, the opportunities to bounce back are significant. We undertake a review of these mid- and small-cap focused funds that are reaping the maximum benefits of the uptake in markets.
Performance: As the name suggests mid- and small-cap funds predominantly invest in companies that are relatively smaller by way of market capitalisation. However, the definition of such companies is difficult to describe and varies from fund to fund. Nevertheless, the stocks these funds invest in usually constitute the smaller companies of the BSE 500 and CNX 500 indices.
Since the US subprime crisis and its effects, corporate earnings suffered tremendously. Domestic markets dropped sharply from January 8, 2008 onwards and hit their lowest levels on March 9, 2009. While there was an improvement in sentiment in January-February of 2009, it has been since March that a clear uptrend is visible.
From the universe of equity mutual funds, we have confined ourselves to the funds that have either been described as mid-cap funds as per their offer documents or whose major investments have remained in small- and mid-cap stocks dominantly for a long time.
We managed to zero in on 29 schemes and charted their performance between March 9, 2009 and July 21, 2009.
Some mid- and small-cap funds spiked considerably after a sharp correction in the markets. Eight funds out of the 29 managed to beat the BSE Mid Cap index over the last four-and-half months. At the same time, the average diversified equity fund managed to deliver much smaller return of 77.36%, while smaller cap funds, on an average, delivered 95.27%. Principal Junior Cap Fund has so far emerged as the best performer, generating an impressive 126.95% returns over the past four-and-half months. Fund houses such as JM Financial, Sundaram BNP Paribas and SBI Mutual Fund have managed two schemes each in this space and delivered high returns on both schemes managed.
Yesterday's losers, today's toppers: During the phase between January 8, 2008 and March 9, 2009, the average mid- and small-cap fund lost (-) 65.78%, while the equity diversified funds' category contained losses to (-) 57.29%.
A look at the top 10 worst performers reveals some disturbing results. Ideally, the worst performers are expected to emerge as the highest returning funds when the markets pick up. The top 10 performing funds' list should bear close resemblance to the top 10 worst performers. However, only five funds from the worst performers list made it to the best performers list. These are JM Emerging Leaders, JM Small and Mid-Cap Fund, SBI Magnum Midcap and Emerging Businesses and Canara Robeco Emerging Equities fund. One of the top performers, SBI Magnum Sector Umbrella-Emerging Business Fund, lost far more than the category average of (-)72.15%. Again JM Emerging Leaders Fund and JM Small and Midcap fund were the worst performers, losing more than 85.96% and 87.1%, respectively, but have managed to impress in the recent uptake.
We also found that of the least losers in the January 8-March 9 period, three funds made it to the topper's list. The ability to regress the least and then come up on tops is what all funds aim to achieve. The three funds that managed to achieve this rare feat are Sahara Midcap, Sundaram BNP Paribas Select Midcap and SMILE funds.
Sector break-up: The main reason for good performance can be attributed to the sectoral allocation. In terms of sectoral performance, these funds kept a high allocation to the banking sector, which performed very well. The larger BSE Bankex grew by 130.35% since March 2009. Within the banking sector, while Bank of Baroda -- a large-cap scrip -- was the most popular among the 29 fund houses. Among the mid- and small-cap companies, Federal Bank was the preferred choice. During the period under consideration, Federal Bank posted a return of 94.11%. Oriental Bank of Commerce was the other favourite in the banking space.
In the oil and gas sector, Castrol India Ltd was the top mid-cap stock, followed by Indraprastha Gas Ltd. Castrol posted returns of 32.14% on an absolute basis over the aforementioned period.
Considerable allocation to the realty sector also paid rich dividends. Among all sectoral indices, BSE Realty has been the top performer as it rose 166.04% since March 2009. However, holdings varied significantly across schemes within this space.
SBI Magnum Sector Umbrella - an Emerging Businesses Fund, which delivered an impressive 120.52% March 2009, maintained a high allocation to the engineering sector. However, some of the funds that played it safe and clung on to the pharmaceuticals sector lagged behind in performance.
Conclusion: While the returns by these funds over a period of four-and-half months look extremely exciting, investor caution is called for. At the end of the day, these mid- and small-cap stocks oscillate widely with severe ups and downs. The average nervy investor might be tempted to dip into this space -- however be prepared for a rollercoaster ride.
Performance: As the name suggests mid- and small-cap funds predominantly invest in companies that are relatively smaller by way of market capitalisation. However, the definition of such companies is difficult to describe and varies from fund to fund. Nevertheless, the stocks these funds invest in usually constitute the smaller companies of the BSE 500 and CNX 500 indices.
Since the US subprime crisis and its effects, corporate earnings suffered tremendously. Domestic markets dropped sharply from January 8, 2008 onwards and hit their lowest levels on March 9, 2009. While there was an improvement in sentiment in January-February of 2009, it has been since March that a clear uptrend is visible.
From the universe of equity mutual funds, we have confined ourselves to the funds that have either been described as mid-cap funds as per their offer documents or whose major investments have remained in small- and mid-cap stocks dominantly for a long time.
We managed to zero in on 29 schemes and charted their performance between March 9, 2009 and July 21, 2009.
Some mid- and small-cap funds spiked considerably after a sharp correction in the markets. Eight funds out of the 29 managed to beat the BSE Mid Cap index over the last four-and-half months. At the same time, the average diversified equity fund managed to deliver much smaller return of 77.36%, while smaller cap funds, on an average, delivered 95.27%. Principal Junior Cap Fund has so far emerged as the best performer, generating an impressive 126.95% returns over the past four-and-half months. Fund houses such as JM Financial, Sundaram BNP Paribas and SBI Mutual Fund have managed two schemes each in this space and delivered high returns on both schemes managed.
Yesterday's losers, today's toppers: During the phase between January 8, 2008 and March 9, 2009, the average mid- and small-cap fund lost (-) 65.78%, while the equity diversified funds' category contained losses to (-) 57.29%.
A look at the top 10 worst performers reveals some disturbing results. Ideally, the worst performers are expected to emerge as the highest returning funds when the markets pick up. The top 10 performing funds' list should bear close resemblance to the top 10 worst performers. However, only five funds from the worst performers list made it to the best performers list. These are JM Emerging Leaders, JM Small and Mid-Cap Fund, SBI Magnum Midcap and Emerging Businesses and Canara Robeco Emerging Equities fund. One of the top performers, SBI Magnum Sector Umbrella-Emerging Business Fund, lost far more than the category average of (-)72.15%. Again JM Emerging Leaders Fund and JM Small and Midcap fund were the worst performers, losing more than 85.96% and 87.1%, respectively, but have managed to impress in the recent uptake.
We also found that of the least losers in the January 8-March 9 period, three funds made it to the topper's list. The ability to regress the least and then come up on tops is what all funds aim to achieve. The three funds that managed to achieve this rare feat are Sahara Midcap, Sundaram BNP Paribas Select Midcap and SMILE funds.
Sector break-up: The main reason for good performance can be attributed to the sectoral allocation. In terms of sectoral performance, these funds kept a high allocation to the banking sector, which performed very well. The larger BSE Bankex grew by 130.35% since March 2009. Within the banking sector, while Bank of Baroda -- a large-cap scrip -- was the most popular among the 29 fund houses. Among the mid- and small-cap companies, Federal Bank was the preferred choice. During the period under consideration, Federal Bank posted a return of 94.11%. Oriental Bank of Commerce was the other favourite in the banking space.
In the oil and gas sector, Castrol India Ltd was the top mid-cap stock, followed by Indraprastha Gas Ltd. Castrol posted returns of 32.14% on an absolute basis over the aforementioned period.
Considerable allocation to the realty sector also paid rich dividends. Among all sectoral indices, BSE Realty has been the top performer as it rose 166.04% since March 2009. However, holdings varied significantly across schemes within this space.
SBI Magnum Sector Umbrella - an Emerging Businesses Fund, which delivered an impressive 120.52% March 2009, maintained a high allocation to the engineering sector. However, some of the funds that played it safe and clung on to the pharmaceuticals sector lagged behind in performance.
Conclusion: While the returns by these funds over a period of four-and-half months look extremely exciting, investor caution is called for. At the end of the day, these mid- and small-cap stocks oscillate widely with severe ups and downs. The average nervy investor might be tempted to dip into this space -- however be prepared for a rollercoaster ride.
Source: http://www.dnaindia.com/money/report_mid-cap-funds-a-rollercoaster-ride_1277301
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