Small- and Mid-cap schemes: Cushioning the fall

Over the past two months (ending 31 March 2013), the S&P BSE Small Cap Index crashed by nearly 19% and the S&P BSE Mid Cap Index fell by nearly 13%. How did small- and mid-cap mutual fund schemes perform over the period? The 40-odd schemes in this category declined by an average of 9% over this period. The top five schemes declined by around 6% whereas the bottom five schemes fell by an average of 13%.

The top 10 stocks on the BSE Mid Cap Index returned an average of 14% during this period; but the bottom 10 stocks fell by more than 50%, on an average. Did the January portfolio of any of these schemes have any of the underperforming BSE Mid Cap Index stocks? Out of the schemes that disclosed their holdings, Manappuram Finance was the only stock from the bottom 10 which was present in the portfolio of a few schemes. Fund managers who keep a diversified portfolio of mid-cap stocks and were able to discard fundamentally poor stocks were able to negotiate the crash better.

Among the top five small- and mid-cap schemes were: Franklin India Prima Fund, Sundaram Select Mid-cap, ICICI Prudential Discovery Fund, IDFC Premier Equity Fund and HDFC Mid-Cap Opportunities Fund. A few of these schemes come from fund houses that have established themselves in equity fund management and were able to weather the crash better than other schemes.

What have these schemes done that is different from the worst performers? The key lies in the asset allocation, apart from superior stock selection. Some small- and mid-cap schemes have the flexibility to invest up to 35% of their portfolio in stocks other than small-caps or mid-caps, as per the definition of the scheme. The schemes that have declined marginally have used this flexibility to their advantage. Analysing the January 2013 portfolio of the top five schemes, we found that most of the schemes had an allocation above 20% to large- and mega-cap stocks. The top 10 holdings of the schemes had a majority of large-cap stocks. Some of the common names in the portfolio of the top five schemes include: GlaxoSmithKline Consumer, IPCA Laboratories and Union Bank of India. Do not be surprised to see Reliance Industries and State Bank of India among the top 10 holdings of a few schemes as well. Coming to the bottom five schemes, just two schemes had an allocation above 20% to large- and mega-cap stocks. However, the schemes came from fund houses like HSBC Mutual Fund and Sahara Mutual Fund which are infamous for the poor performance of their equity schemes.

Though having an allocation to large companies helped the top schemes to reduce their downside risk, when there is a sharp upmove, investors may lose on the returns. However, it is pertinent to note that IDFC Premier Equity Fund and ICICI Discovery Fund have been among the top performing mid-cap schemes and both have done well to negotiate the crash as well. Therefore, choose a scheme that has done well consistently.

 

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