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Continued underperformance of small- and mid-cap stocks has prompted fund managers to increase the size of their cash holding. And, they aren’t deploying money into the stocks despite the recent outperformance.
A mix of redemption pressure and a lack of conviction in the recent rally is prompting them to remain cautious, insiders say.
Cash holding refers to the component of an equity scheme held in the form of liquid assets. This can be used to meet withdrawal needs of investors. It is also used by fund managers to prevent a downside if they expect the markets to tank.
Schemes investing in small- and mid-cap stocks from several marquee fund houses have increased cash levels up to three per cent since January, according to an analysis by Business Standard. Franklin Templeton, Birla Sun Life, IDFC, SBI and DSP Blackrock are among those that have increased exposure to cash and other equivalents. In September, cash levels, as percentage of the total assets, had risen to about ten per cent for several funds.
The rally in small- and mid-cap stocks seen last month hasn’t led to fund managers reducing cash levels in these funds.
“While the valuations in the mid- and small-cap segment are much lower than those of large-caps, the risks in that segment are also higher. Investors need to weigh both risks and potential returns from this segment before investing in these,” said Harsha Upadhyaya, chief investment officer (equity), Kotak Mahindra Asset Management. “For now, the outlook on the mid- and small-cap segment continues to be the same as it was a few months ago because recovery in this segment is still more in the realm of hope than certainty.”
Further, fund managers said higher cash levels were aimed at meeting the high redemption pressure faced by these funds. “At every rise in the markets, investors were looking to book profits, leading to huge redemption pressure in the funds. Fund managers were thus forced to maintain high levels of cash,” said an equity fund manager with a domestic fund house.
For small- and mid-cap equity funds, average cash holding is two-five per cent. However, during weak market conditions, average cash levels could rise to 10 per cent, fund managers said.
Since January this year, the BSE mid-cap index has fallen 21 per cent, while the BSE small-cap index has declined 26 per cent. However, activity in the small- and mid-cap category of stocks picked up in October, as markets rebounded on an appreciating currency and strengthening foreign flows.
In the recent rally seen in October, the BSE mid-cap index rose 8.4 per cent, while the small-cap index gained 7.8 per cent.
A few industry officials believe the outlook on this segment is turning bullish, with signs of recovery in the economy. “Markets are showing signs of a recovery, despite the pressure on the currency we have seen in the last few days. The rebound in the market would see higher participation from stocks in the mid- and small-cap segment,” said Navneet Munot, chief investment officer, SBI Mutual Fund, which manages three mid- and small-cap equity funds.
He added investors could take more interest in these stocks, as the valuation gap between large-cap and small- and mid-cap stocks had increased.
