The Economic Times
July 02, 2018
Funds that survived the midcap carnage: Kaustubh Belapurkar
Kaustubh Belapurkar, Morningstar Investment Adviser, tells ET Now, that while largecaps should form the core of a portfolio, smallcaps would be the growth drivers which you buy and forget for the next 10, 15 years.Edited excerpts: In this mid-cap carnage, which are the funds that have stood resilient and which are the ones which are going down? We have seen a fair bit of drawdown on the midcap indices this year but over the long term, when I look at three, five-year basis, a lot of funds have stood rock solid. So, names like HDFC, DSP, L&T, Kotak, Franklin Templeton, these are the ones on top of my mind, the funds that have done extremely well during this period of time.Some of the names that I mentioned have actually stood pretty solid even in this carnage. They have been in some of the stocks that did not correct as much or actually actually appreciated during this time. So, it is important to appreciate that in the midcap index the divergence of returns is massive. While some have fallen 60% on the short period of time, someone is actually up 40% in the same timeframe.Which are the ones which are giving you that kind of stark underperformance within the funds?Banking stocks like Bank of India, Union Bank, these are some names of financials that have really depreciated over this period of time.Would you have a list of funds which are underperforming? I would not say over a short term. There are a bunch of names that have probably fallen off 15% which is in line with the index, but I would want to look at it on a long term basis. Funds will go through periods of underperformance where stocks which ran up sharply in 2017 are now down because the valuation has corrected but that does not necessarily mean that the fund has become a bad fund over the short period of time.The point about the stark underperformers and stark outperformers is interesting. It is always stock picking at the end of the day, index of course is just essentially a benchmark to judge what they are doing. So, going forward, where exactly do you think the funds in the mid and small caps spectrum, that should be poised to be able to deliver well? Should one invest in growth funds?In the midcap and small cap segment, I would park a lot of my money in funds where most of the managers are in growth style. These are stocks that are expected to grow at significant rates over the next five, ten years and that is why the managers are really betting money. It is not really too much of a value play in this segment. There could be some value plays where some negative news has really brought a stock down but largely you would see that you are looking at large growth numbers coming from these stocks. That is why managers are betting on a five, 10-year cycle on these stocks.Any themes?Some of the trends that we have seen in materials, cement stocks, paint stocks, that is happening. Consumer cyclicals, some of the auto ancillary companies or leisure companies are some of the trends that are catching up. The latest trend obviously is some of the mid-tier IT companies which have appreciated. One sees manager interest in MindTree, Cyant, a couple of other names. It is an interesting mix but growth is going to be the primary parameter when you are looking at it.But have you seen a dramatic shift in how funds are approaching small and mid-caps? Are you seeing some of the hybrid variety or multicap funds reduce their exposure drastically or are you seeing that within small and mid-caps, they are shifting from one end of the curve to maybe the other IT, pharma or whatever?A couple of things; one thing that has happened is clearly with regards to valuations. The way they had run up, managers became even more stock specific in the small and midcap space. They do have some leeway in buying largecaps. You want to pad that up with some largecap names just to provide some more liquidity in your portfolio. So, it is not a large shift but there is some shift happening there. The other thing that has happened is obviously more of a regulator forced move where SEBI has come and said that if you are a smallcap fund you need to hold at least 65% of your portfolio into smallcap stocks and ditto for midcap funds. There has been more of a shift because they have been realigning the portfolio over the last couple of quarters to get in line with the regulator mandate and move.So you have seen them becoming more pure small and midcap funds and obviously taking a much more measured approach when getting into some of these counters. In terms of sectors, IT is one of the counters where we have seen some additions on the midcap counter other than obviously the larger ones and the other parts of the market.Where have you seen money move out of? Any specific sectors or themes?So, I would say not too much money but the focus has moved away from financials, especially in this counter. This is because most of the street prefers some of the large banks and larger financial services companies, the safer guys.So, a lot of managers even in the small and midcap funds, wherever they can take some exposure they take it in the likes of Kotak Mahindra and HDFC rather than going into some of the newer names.What about large cap funds? Large cap funds certainly have been great outperformers . What is the trend you have witnessed?Largecaps are in a catch-up situation. Small and midcap indices just hit it out of the ballpark in 2017. The smallcap and midcap indices were 40-50-60% up whereas the large caps lagged behind. Hence the correction. We started the year with largecaps rallying, especially some of the technology names and few of the others.In the correction after that, there was no big fall in largecaps. The index is almost flattish and the funds have been either around the index level. Largecaps form the core part of the portfolio that is the one which should always be there. Smallcaps would be your growth driver which you buy and forget for the next 10, 15 years in your portfolio.
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