Fundmen take first flight out of mid-cap stocks

The segment is expected to be worst hit in a correction phase, fear analysts.

The mid-cap mania is fast dying down, at least among fund managers. The withdrawal symptoms are apparent now: most top equity diversified funds are reducing their exposure to mid-cap stocks.

The development is in contrast to the trend earlier in the year, when fund managers were busy stocking up on mid-caps to boost returns.

SBI Magnum Global Fund, the only fund to have outperformed the CNX Midcap 200 index in the past 12 months, has cut down its exposure. The fund, among the best performing equity funds in the past year, posted a return of 113.62 per cent compared with 104.98 per cent managed by the CNX Midcap 200 index.

Interestingly, the fund's exposure to stocks in the CNX Midcap index, which stood at 68.73 per cent in June 2004, now stands at 55.44 per cent. 
 

What's in the kitty Exposure of leading funds to midcaps (%)
Scheme	1 -year returns	4-Jun	5-Jun
SBI Mag Global Fund 94	113.62	68.73	55.44
SBI Mag Umbrella - Contra	101.5	35.57	26.32
Reliance Growth	99.88	45.98	46.61
Sundaram Select Midcap	90.45	57.36	54.76
SBI Mag Plus 93	90.4	44.26	59.34
Tata Growth Fund	85.32	39.61	45.97
Franklin India Prima	80.74	77.80	61.47
Alliance Equity Fund	78.78	43.66	37.10
HDFC Capital Builder	72.53	43.79	42.23
DSP ML Equity Fund	71.66	26.85	28.91

Other top equity performers also seem to have taken the same route. SBI Magnum Sector - Contra, which has a one-year return of 101.50 per cent, has reduced its investment in mid-caps from 35 per cent to around 26 per cent as of June 30, 2005.

Other examples are Franklin India Prima Fund (77.80 per cent in June 2004 to 61.47 per cent currently) and Alliance Equity Fund (43.66 per cent to 37.10 per cent).

With too many funds and too much of money chasing limited number of quality mid-cap stocks, higher returns from the segment seems irrational. Analysts note the segment is very low on liquidity compared with other sectors and the stocks too are no longer cheap.

Analysts are of the view that though mid-caps have given superb returns during the bull run, they are expected to be the worst hit in a correction phase.

According to Sandip Sabharwal, head of equities at SBI Mutual Fund, "As the market has become quite overheated, funds are shifting investments from mid-caps to large-caps and other sectors to avoid risks. Larger equity diversified funds have made enough money from the segment, therefore, most fund managers are playing it safe. This is a cyclical movement."

The lack of investment options in mid-caps was indicated by Reliance Mutual , when it said that fresh applications would be stopped in its Growth Fund when the corpus touches Rs 1,700 crore or by mid-August, whichever is earlier.

The fund house justified the move, saying that this was being done in the interest of unitholders. "This is a very common phenomenon in many developed countries, to shut the door on fresh applications when the corpus of the fund becomes too large. It wouldn't be long before this becomes a trend in India as well," said Sabharwal.

Not all fund managers, however, subscribe to the view. According to Paras Adenwala, chief investment officer for equities with ING Vysya Mutual Fund, "The potential of the mid-cap sector is very high and it continues to give excellent returns. I do agree that short-term corrections are possible in the future but long-term prospects are still rosy. The flavour of mid-cap fund is sure to stay for long."

Some funds have, however, increased their exposure to mid-caps in the past year. One of SBI Mutual's leading fund, SBI Magnum Multiplier, has increased its exposure to mid-caps from 44 per cent last June to 59 per cent, at present. Tata Growth Fund and DSP Merrill Lynch Equity Fund are the others funds to have gone long on mid-caps.