Check these 7 mid-cap funds

By Morningstar Analysts |  11-08-17 | 
 

IDFC Sterling Equity

  • Date of Analysis: July 2017
  • Star Rating: 2 stars Analyst Rating: Silver
  • Investment Style: Mid Growth
  • Process: Bhaskar scouts for growth-oriented companies available at reasonable valuations. He is mindful of the sector weights in the benchmark index when constructing the portfolio.
  • Fund Manager: Anoop Bhaskar
  • Morningstar Analyst: Himanshu Srivastava

 Bhaskar pays heed to the IISL Nifty Free Float Midcap 100 Index, loosely aligning the portfolio’s sector weights with those of the index. Having said that, he does not mind being significantly overweight or underweight in sectors either from a bottom-up basis or macro perspective. Yet, Bhaskar has a distinctive style of investing which he brings to the fore while executing the strategy. Consequently, the portfolio went through a makeover after he took over the fund to ensure that it is in line with his investment approach. While investing, he looks for companies which have decent amount of promoter holdings, good cash generation, low leverage, and profitability over a cycle. He avoids businesses that show profitability in spurts. Given the fund’s small/mid-cap bias, it gives Bhaskar an opportunity to play to his strength since he is a proven small/mid-cap specialist.

The leadership at this fund has witnessed multiple changes in the past. The investment team has witnessed significant turnover in the last few years. Except for Bhaskar, the other team members currently lack long-term portfolio management track record, though they have good research experience. Hence there is a key-man risk in Bhaskar.

Read a more detailed note on IDFC Sterling Equity here

IDFC Premier Equity

  • Date of Analysis: July 2017
  • Star Rating: 4 stars Analyst Rating: Bronze
  • Investment Style: Mid Growth
  • Process: Investing in niche businesses that are outside the mainstream. The manager plies a benchmark-agnostic approach to portfolio construction.
  • Fund Manager: Anoop Bhaskar
  • Morningstar Analyst: Himanshu Srivastava

This fund is run with a rather unique investment strategy, and Bhaskar prefers conserving its distinct appeal. The mandate here is to identify companies that are niche, emerging, and different from the mainstream. Bhaskar picks stocks that are at the end of a cycle, have not performed well, but can scale up during longer time frames. As a result, investments are typically made in unconventional names within the sector. The investment approach is benchmark-agnostic, in contrast with the way Bhaskar has traditionally managed funds.

Execution here under Andrade was exceptional, earning a Morningstar Analyst Rating of Silver. Under Bhaskar, the fund has just completed one year, and given the unique proposition it offers, that is too short a time frame to prudently evaluate his execution. Having said that, Bhaskar’s experience and managerial capabilities merit a Positive rating, in our opinion. But at the same time, we would like to see its execution under him in a longer time frame before gaining the same level of conviction in this strategy as we have on his other strategies.

Read a more detailed note on IDFC Premier Equity here

Mirae Asset Emerging Bluechip

  • Date of Analysis: July 2017
  • Star Rating: 5 stars Analyst Rating: Silver
  • Investment Style: Mid Growth
  • Process: Stock selection has been the primary contributor of performance. Investment process consistent over all time frames, leading to consistency in fund performance.
  • Fund Manager: Neelesh Surana
  • Morningstar Analyst: Nehal Meshram

The fund manager’s distinctive stock-picking ability and skilled execution are the defining factors in this fund.

An interesting facet of Surana’s investing style is he sticks to his convictions even if the situation is contrary to his investment decision. The strategy is centred on a bottom-up stock-picking with exhaustive filtration laying emphasis to margin of safety. This approach limits the decision of the manager going wrong. Surana believes alpha is generated through the right stock selection and not by sector rotation. He only invests in companies that meet the stock selection parameters and would look at both qualitative and quantitative factors. A key quantitative parameter he tends to follow is high return on capital and high cash flows. With this strategy, the fund has delivered above-average returns and has emerged as a winner in the respective categories. The fund’s lower expense ratio vis-a-vis its peers also makes the fund more appealing.

The strategy makes the fund a good proposition. We view it positively that Surana works closely with the investment team, but we also believe there is a huge key man risk. However, overall we like the investment process and believe the fund can hold investors in good stead over a market cycle.

Read a more detailed note on Mirae Asset Emerging Bluechip here

 

SBI Magnum Midcap

  • Date of Analysis: July 2017
  • Star Rating: 2 stars Analyst Rating: Bronze
  • Investment Style: Mid Growth
  • Process: A mid-cap fund with a low downside risk; tends to outperform in a falling market. A high-conviction mid-cap strategy that invests in growth stocks.
  • Fund Manager: Sohini Andani
  • Morningstar Analyst: Kavitha Krishnan

The fund house has witnessed a few ups and downs, but the SBI Magnum Midcap fund has endured these changes since its inception in 2005. We witnessed many positive attributes on the fund under its current investment team, some of them being the leadership of an experienced stock-picker, the backing of a stable process, and an experienced team that has been trained in-house. We maintain a Morningstar Analyst Rating of Bronze on this fund and would like to see the process and the team remain stable over a longer period before we build further conviction.

Sohini Andani is an experienced portfolio manager and an astute stock-picker. Her extensive research experience stands out in her stock picks and is reflected in the AMC’s bottom-up approach to stock selection. She used to track the IT and banking sectors in the past and currently tracks the agrochemical sector. She is rightly credited with having mentored the analyst team at SBI along with R.Srinivasan. We also view the presence of CIO Navneet Munot and head of equities R.Srinivasan as a positive. In our opinion, the trio of Munot, R.Srinivasan, and Andani constitutes the core pillars at the AMC and has been instrumental in structuring the processes within the fund house.

The SBI Magnum Midcap fund is an absolute return strategy that invests in Andani’s high-conviction ideas. The fund uses in-house templates and processes that are key to the execution of the strategy. Although the mandate allows the manager to invest up to 20% in large-cap stocks, most of the large caps that form a part of the portfolio are mid-caps that have grown in size. We think that these stocks give the fund a cushion in terms of additional liquidity. The fund is run based on a bottom-up approach to investing with a clear focus on a company’s fundamentals.

Read a more detailed note on SBI Magnum Midcap here

HDFC Mid-Cap Opportunities

  • Date of Analysis: May 2017
  • Star Rating: 5 stars Analyst Rating: Gold
  • Investment Style: Mid Growth
  • Process: Setalvad seeks quality companies from the mid-cap segment that he believes are reasonably priced. The manager invests in tangible businesses and continues to hold them over the long term.
  • Fund Manager: Chirag Setalvad
  • Morningstar Analyst: Kavitha Krishnan

The fund is one of the best at what it does. Chirag Setalvad stands out as a capable manager who applies a hands-on approach towards research.

The small/mid-cap segment can best describe the volatility across Indian equity markets. Other factors such as constrained liquidity and limited coverage can make small/mid-cap investing slightly more challenging. Hence, the need for a skilled manager and a solid investment process cannot be overstated. HDFC Mid-Cap Opportunities makes the grade on all counts.

In our opinion, Setalvad ranks amongst the best portfolio managers in the India Small/Mid-Cap Morningstar Category. He has been managing this fund since its inception in June 2007, and we view his long tenure at the fund house as a positive. Detailed and exhaustive research is central to his investment approach. Setalvad emphasises gaining an in-depth understanding of a business before investing. He seeks companies with proven track records so he can gauge how they have held up during testing times.

There is a perceptible quality bias in the investment style, characterised by investments in companies with strong management teams and robust business models. This inherent investment style is one that we have come to associate with the fund company’s equity funds. Setalvad combines absolute and relative valuation parameters to select stocks that aren't too expensive relative to their growth prospects.

The manager is a patient investor with a long-term investment horizon, which jells well with the quality bias. Given the bias for quality stocks, we expect the fund to underperform the competition in market phases when speculative fare is in favour. Investors must also note that Setalvad’s tendency to make contrarian investments can result in a divergent showing versus the category over shorter time periods. Nonetheless, over a market cycle, we believe the fund is equipped to serve investors well.

Read a more detailed note on HDFC Mid-Cap Opportunities here

HDFC Small Cap

  • Date of Analysis: May 2017
  • Star Rating: 2 stars Analyst Rating: Bronze
  • Investment Style: Small Blend
  • Process: Setalvad runs a diversified small cap portfolio with a focus on quality stocks. The manager invests in tangible businesses and continues to hold them over the long term.
  • Fund Manager: Chirag Setalvad
  • Morningstar Analyst: Kavitha Krishnan

The fund seems to be stabilising at a portfolio level, after having gone through a recent strategy change. While we think that Chirag Setalvad's expertise and skill will hold the fund in good stead, we’d like to monitor the fund over a longer term before we are able to build further conviction.

This fund was initially known as Morgan Stanley A.C.E Fund and invested across market caps. The fund was renamed HDFC Small and Mid-Cap fund following HDFC’s acquisition of Morgan Stanley’s schemes in 2014. In September 2016, the fund’s investment strategy underwent yet another change and was renamed HDFC Small Cap Fund, with a corresponding change in asset allocation. Although the AMC is making efforts towards streamlining its product offerings, multiple changes that we’ve witnessed over the years lead us to take a slightly conservative stance on this fund.

Setalvad ranks amongst the best portfolio managers in the India Small/Mid-Cap Morningstar Category. He has been managing this fund since 2014 and has been associated with HDFC since 2007. We view his long tenure at the fund house as a positive. Detailed and exhaustive research is central to his investment approach. Setalvad emphasises gaining an in-depth understanding of a business before investing. He seeks companies with proven track records, so he can gauge how they have held up during testing times.

There is a perceptible quality bias in the investment style, characterised by investments in companies with strong management team and robust business models. This inherent investment style is one that we have to come to associate with the fund company’s equity funds. Setalvad combines absolute and relative valuation parameters to select stocks that aren't too expensive relative to their growth prospects.

The manager is a patient investor with a long-term investment horizon, which gels well with the quality bias. Investors must also note that Setalvad’s tendency to make contrarian investments can result in a divergent showing versus the category over shorter time periods.

Read a more detailed note on HDFC Small Cap here

 

Sundaram Select Mid Cap

  • Date of Analysis: April 2017
  • Star Rating: 4 stars Analyst Rating: Bronze
  • Investment Style: Mid Growth
  • Process: A well-defined process, aimed at constructing a growth-oriented long-term portfolio of stocks. A portfolio that is built based on high-conviction ideas and can tend to be sector-heavy.
  • Fund Manager: S. Krishnakumar
  • Morningstar Analyst: Kavitha Krishnan

The fund house is witnessing a lot of changes on the people and strategy front, and we’d like to see it stabilise over the long term before we build more conviction on the fund.

Krishnakumar has been managing this fund since November 2012. We believe that he is a proficient manager in the small- and mid-cap space and invests in fundamentally sound stocks with positive growth prospects, good pricing power and stable cash flows. Krishnakumar is valuation-conscious while investing in stocks, but is willing to stay invested in companies with higher valuations if longer-term growth prospects appear favourable.

The investment style is essentially bottom-up with a buy-and-hold philosophy on high-conviction names. Krishnakumar’s in-depth understanding of companies and background in researching small- and mid-cap stocks is an advantage. He typically seeks to invest in quality companies with differentiated businesses.

Although the investment team is quite experienced, they have recently undergone a restructuring process, with managers being assigned roles that reflect their areas of strength. This will yield positive results over the long term but we would like to evaluate the impact of these changes over a longer term before we build more conviction on the team.

Although the fund’s allocations towards large caps have gone up slightly over the past year, it continues to remain true to its mandate and has a higher exposure to small- and mid-cap stocks than its category peers. The fund’s long-term orientation could lead to a divergent performance profile compared with the competition and index over shorter periods. However, the investment process should hold the fund in good stead over the long term. Despite having a positive view on the fund, we would like to adapt a wait-and-watch approach to see how the changes pan out over the long term. Based on these factors, we assign a Morningstar Analyst Rating of Bronze on this fund.

Read a more detailed note on Sundaram Select Mid Cap here

Add a Comment
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Larissa Fernand
Aug 31 2017 02:50 PM
Thank you Soumen and Dandeep for your feedback, I have fowarded it to the research team.
SOUMEN DEY
Aug 18 2017 05:13 PM
Dear Larissa, hope you recall our email exchange about convoluted language. Read from Mirae Emerging Blue: “In our opinion, we have a lot of comfort around the manager and his research-intensive investment approach.” Saying you have comfort with manager etc is an opinion in itself, why preface it with “in our opinion”. This is just one example, many more can be found. As discussed earlier, research is not about filing up pages with lots of words.
sandeep deshmukh
Aug 14 2017 06:26 PM
Your piece on SBI Magnum Midcap is disappointing. So many words, and hardly anything worthwhile said.

There are dramatic statements with no meaning. For eg "SBI Mutual Fund has seen many up’s and down’s. But it cannot afford to go down again". What will happen if it goes down again? Is there a divine prophecy which prevents another turnaround?

You are impressed with the new leadership since 2009. You like the fund manager who is there for 7.5 yrs (info taken from your site). How much more do you need to "see the process and the team remain stable over a longer period before we build further conviction". What is your observation period? Why not specify it?

How does it help to list which sectors the fund manager is tracking? I don't think there is any established standard in terms of which and how many sectors a fund manager tracks. Saying that she is an astute stock picker should suffice.

It is apparent that (a) you do not understand the fund, and hence the tons of redundant editorializing (b) you are unable to justify the ordinary performance versus your Rating of Bronze (c) there is poor understanding of investing basics.
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