Fire sale by MFs spells trouble for portfolio management services

The Securities and Exchange Board of India’s (Sebi’s) reclassification of equity mutual funds seems to have led to a sharp fall in many mid- and small-cap stocks. This, in turn, is hurting many fund managers in the portfolio management services (PMS) space who placed bets on them. “Many schemes have started selling certain stocks in block deals. And many PMS players who were invested in these stocks are feeling the pinch,” said the chief executive officer (CEO) of a fund house.

South India-based Equity Intelligence founder Porinju Veliyath, who, according to sources, runs a Rs 10 billion PMS, wrote to investors this week confessing it had been underperforming the market since January. He was baffled by the extent of value erosion in such a short period. “There has been an unusual sell-off in non-index stocks, particularly mid- and small-caps, due to multiple reasons, including political developments, banking clean-up and mutual fund restructuring to comply with Sebi reclassification norms,” Veliyath told Business Standard. Veliyath’s PMS is benchmarked against the Nifty. The Nifty mid- and small-cap indices are down 10.6 per cent and 14.1 per cent, respectively, since January.  

Investment advisor S P Tulsian’s PMS is also under pressure. “It gives me immense pain to see these losses being caused,” Tulsian wrote to his investors. He added he would offer more profitable calls hereon to recoup the loss. According to industry sources, there are four or five other PMS schemes under pressure because of the sell-off in the mid- and small-cap sectors.  

The market regular had come out with the reclassification guidelines in October. However, the MF industry has started repositioning itself recently. Under these guidelines, large-cap funds can have 80 per cent stocks in large-cap companies or top 100 companies. Mid-cap funds can have 65 per cent in mid-cap stocks and multi-cap funds can have 65 per cent in equities. A Balasubramanian, CEO of Birla SunLife Mutual Fund and chairman of Association of Mutual Funds in India, said: “The Sebi guidelines have made life easier for money managers because they know the parameters under which they have to operate. There will be some repositioning by fund managers for some time. But there is enough leeway for them to operate.”

Other market experts believe given that the market has been volatile, bottom fishing has become quite difficult for fund managers and PMS players. “In a rising market, mid- and small-caps are the flavour of the market. The reverse holds true in a falling market. With Sebi tightening the definitions of mutual funds and schemes, the pain being felt by mid- and small-cap stocks has been aggravated. And with the result season coming to an end, with no significant improvement in performance, the pain is higher,” said Arun Kejriwal, investment advisor.

Veliyath said the correction in mid- and small-caps was overdue. However, now it is done for most stocks and over-done in many stocks. “The current weakness in the market and lack of buying interest is temporary,” he said.