MFs ride mid-caps to glory

Equity diversified funds have ridden to success largely on the back of mid-cap stocks.

If there is any conclusion to be drawn from the performance of equity mutual funds over the past year, it is this - this is a stock picker's market.

The only way to the top is bottom up. Times when funds would blindly select the best scrips in favoured sectors are long passé. When it comes to picking stocks, funds are looking beyond large-caps.

And mid-caps are the pack that rules the roost these days. Interestingly, the way top stocks are shuffled in the portfolios of leading performers signifies one thing - picking stocks in this market is almost as tough as finding a needle in a haystack.

When you look at the top performers for the past 12 months (as on April 20, 2005), you can see that most of them have a huge mid-cap orientation. 

For instance, the top funds in terms of returns include SBI Magnum Global Fund (one-year return of 80.35 per cent), SBI Magnum Sector Umbrella - Contra (62.10 per cent), Reliance Growth Fund (59.26 per cent), Sundaram Select Mid-cap Fund (55.49 per cent), Franklin India Prima Fund (54.02 per cent) and HDFC Capital Builder (50.93 per cent).

Mid-caps have outperformed
Most of these funds have portfolios which are heavily skewed in favour of mid-cap stocks. And when you consider that CNX Midcap 200 Index has by far been the best index performer in terms of returns (66.12 per cent) in the past 12 months, the story becomes clear. For the record, BSE Sensex managed a return of 11.02 per cent. 

How indices fared
Returns in % as on April 26, 2005
Indices	3 months	6 months	1 year
CNX Midcap 200	15.24	44.25	66.12
BSE Cons. Durables	17.83	34.87	57.36
BSE Capital Goods	21.64	37.34	43.65
BSE IT	1.06	4.13	33.41
BSE Teck	0.33	5.87	29.71
BSE Bankex	9.89	40.45	19.25
BSE FMCG	-0.03	22.22	16.17
BSE 500	4.36	16.89	14.96
CNX500	4.07	16.71	14.45
BSE100	2.87	13.42	11.77
BSE200	3.18	14.15	11.13
BSE Sensex	2.87	12.19	11.02
S&P Nifty	1.31	9.88	7.72
BSE-Healthcare	-5.04	-4.1	-0.56
BSE PSU	3.8	15.69	1.54

So fund managers are more addicted to 'the mid-cap mania' than one would expect them. This explains the launch of so many mid-cap funds in the past few months.

The list of funds launched recently includes Kotak Midcap, Magnum Midcap, Sahara Midcap, Chola Midcap, Sundaram SMILE and CanEmerging Equities, apart from HSBC Midcap Equity Fund and ING Vysya Midcap Fund. 

Exposure to CNX Midcap 200
(In %) Scheme	AUM (Rs cr)	5-Mar	4-Dec	4-Mar
Franklin India Bluechip	1650.52	NA	NA	0.15
HSBC Equity Fund	1574.78	8.29	13.8	7.06
UTI Mastershare	1338.6	6.65	5.77	5.61
Franklin India Prima Fund	1320.25	45.58	42.7	26.83
UTI Mastergain 92	1263.05	10.34	6.2	4.69
HDFC Equity Fund	1074.59	21.67	19.4	8.77
Reliance Growth	1036.58	32.57	32.61	13.52
UTI-MEPUS	886.01	4.66	3.81	3.02
HDFC Capital Builder Fund	761.34	29.07	23.41	23.79
UTI Masterplus Unit Scheme 91	668.96	4.42	5.06	2.67
Source: www.mutualfundsindia.com

According to Gaurav Narain, equity fund manager at ING Vysya Mutual Fund, there are many reasons why mid-caps will record stronger growth in the future.

"The size of these companies remains small compared to the opportunity. The average growth of revenue and profit in mid-caps is also likely to be higher, apart from margin expansion opportunities," notes Narain. But what makes mid-caps tick is the lure of superior returns.

"Mid-caps have a higher potential for earning superior returns, through sheer growth of earnings as well as a re-rating of valuations," adds Narain.

Mid-caps are defined differently by funds. However, they broadly fall in the market cap range of Rs 100 to Rs 3,000 crore. Needless to say, given the vastness of the mid-cap pool, what makes fund schemes stand out is their superior stock-picking ability, which ensures superior returns.

"As far as general markets are concerned, mid-caps have clearly outperformed over the past year," notes Sashi Krishnan, chief executive of Cholamandalam Mutual Fund.

"Keeping that in mind many equity diversified funds have shifted their focus to the mid-cap segment in an effort to boost their returns," he adds.

According to Sandip Sabharwal, head of equities at SBI Mutual Fund, the current tilt towards mid-caps are due to various reasons. "Post-2000, when the markets crashed, the markets became very risk-averse and moved to large-cap stocks in a big way. However, of late we have seen mid-cap counters have become more liquid and companies across market-cap segments have also done well in terms of performance".

A varied universe
A look at the portfolio of leading funds mentioned above reveals one thing - there is no one single route to the top. The portfolios reveal a varied number of stocks which have enabled these funds in their climb to the top.
 

Most popular stocks
	Popularity index*		Sum of market value (Rs cr)
	5-Mar	4-Dec	5-Mar	4-Dec
Infosys Technologies	100	100	2482.43	2054.71
State Bank of India	99	98	3204.34	2849.31
Punjab National Bank	98	25	910.29	151.41
Bharat Heavy Electricals	87	91	1331.09	1224.91
Tata Iron & Steel Co	85	85	1397.93	1253.82
Tata Consultancy Services	83	77	1491.42	1311.08
Oil & Natural Gas Corp	78	85	1807.91	1159.24
Associated Cement Companies	77	91	1181.13	1419.83
Reliance Industries	77	87	2200.19	2138
Satyam Computer Services	73	83	1839.01	1325.24
Grasim Industries	69	86	1343.1	1643.51
Hindalco Industries	66	73	1206.77	1253.81
Mahindra & Mahindra	60	81	971.28	1186.73
Tata Motors	59	74	599.25	627.04
ITC	58	83	1146.7	1564.45
Larsen & Toubro	54	52	542.78	469.41
Bharati Tele-Ventures	51	61	460.15	626.62
ICICI Bank	50	48	952.27	598.1
Siemens	39	40	1033.85	786.02
Crompton Greaves	26	29	958.54	756.91
Source: www.mutualfundsindia.com

While Birla Midcap has Tata Elxsi, LIC Housing Finance and McDowell & Company as its top holdings, SBI Magnum Global Fund has Arvind Mills, Havells India, KEC International and Thermax among its top holdings.

Meanwhile, Sundaram Select Midcap has backed Balrampur Chini Mills, Lakshmi Machine Works and Bajaj Hindustan as its top three holdings.

Franklin Prima, among the most consistent equity diversified funds, has LIC Housing Finance, Indian Rayon, Eicher Motors and Gujarat Gas Company among its top holdings.

While it can be said that the bull run has largely been on the back of mid-caps, the variation in stock selection does point to the keen stock picking abilities of fund managers.

For example, SBI Magnum Global Fund has textile scrip Arvind Mills as its top holding as per its March, 2005 portfolio. A year ago the stock did not even figure in the portfolio.

While Arvind Mills has stayed as its top holding since December 2004, the fund did some adjustments in its portfolio during the period. The exposure to stocks like Balrampur Chini, KPIT Cummins and United Phosphorus was reduced while there was a hike in holdings of Havell's India, KEC International, Jaiprakash Industries and Mercator Lines.

Birla Midcap Fund has successfully managed to churn its portfolio to stay on top. The fund had FMCG stock Britannia Industries as its top holding 12 months ago, but as of March 2005, its leaning has changed towards Tata Elxsi. 

Stocks where MFs have increased exposure most
Stock	MF holding in (%)		Chg.	MF stake in  (Rs cr)		Chg.
	Mar 05	Dec 04		Mar 05	Dec 04	(Rs cr)
Megasoft	10.19	0.00	10.19	22.45	0.00	22.45
Century Plywood	8.69	0.00	8.69	0.00	0.00	0.00
Kesoram Ind	13.80	5.26	8.54	76.00	27.05	48.94
Infotech Enterprises	14.50	5.99	8.51	59.19	16.61	42.59
Excel Ind	6.30	0.01	6.29	4.12	0.01	4.12
Clariant	13.66	7.55	6.11	41.14	25.32	15.82
Jindal Saw	7.37	1.43	5.94	76.99	13.05	63.94
Orient Paper & Ind	7.23	1.72	5.51	14.96	2.29	12.67
Federal Bank	16.84	11.49	5.35	170.47	123.73	46.74
Shivvani Oil	4.97	0.00	4.97	15.83	0.00	15.83
Automobile Corp of Goa	5.02	0.09	4.93	5.60	0.06	5.54
Adlabs Films	6.13	1.35	4.78	17.15	3.40	13.75
Vimta Labs	13.59	8.96	4.63	28.78	18.49	10.29
JK Ind	4.59	0.04	4.55	16.87	0.12	16.75
Simbhaoli Sugar	4.36	0.00	4.36	3.61	0.00	3.61
McDowell & Co	9.82	5.73	4.09	119.33	37.43	81.90
Savita Chemicals	4.64	0.57	4.07	9.38	0.85	8.52
Dhampur Sugar	4.04	0.07	3.97	18.79	0.22	18.57
Tata Elxsi	11.09	7.17	3.92	63.70	34.66	29.04
Valecha Engineering	6.62	2.79	3.83	4.50	1.50	3.00

In fact, when you compare the fund's December portfolio with the current one (March, 2005), you can see a perceptible shift. While MNC pharma stocks, Glaxo SmithKline and Aventis held the top two positions in December, LIC Housing Finance and McDowell & Company were among the top three behind Tata Elxsi in March.

However, not all funds have felt the need to drastically change their portfolios in the past quarter. Funds like Franklin Prima and Sundaram Select Midcap have stayed the course with more or less the same portfolio in the past quarter. 

Stocks where MFs have decreased exposure most
Stock	MF holding in (%)		Chg.	MF stake in  (Rs cr)		Chg.
	Mar 05	Dec 04		Mar 05	Dec 04	(Rs cr)
Pennar Aluminium	1.48	13.43	-11.95	0.53	5.16	-4.62
Orissa Sponge Iron	0.16	10.63	-10.47	0.11	6.98	-6.88
Nagarjuna Construction	7.57	16.74	-9.17	68.70	101.40	-32.70
Dewan Housing Fin. Corp	5.00	13.19	-8.19	6.26	16.36	-10.11
Mysore Cements	3.28	9.44	-6.16	5.66	15.75	-10.08
Jaipur Polyspin	0.28	6.33	-6.05	0.04	1.05	-1.01
Mangalam Cement	3.84	9.24	-5.40	7.83	15.60	-7.76
Maral Overseas	11.24	16.59	-5.35	7.81	15.33	-7.52
Indian Resort Hotels	1.79	7.04	-5.25	1.31	4.20	-2.90
Sunraj Diamond Exports	0.26	5.36	-5.10	0.01	0.39	-0.38
Energy Development Co	1.81	6.76	-4.95	0.86	3.33	-2.48
JK Synthetics	0.31	5.09	-4.78	0.16	5.16	-5.00
Alps Ind	4.56	9.33	-4.77	2.97	6.43	-3.46
Bata India	6.55	11.26	-4.71	25.95	49.82	-23.87
Premier Auto	0.06	4.69	-4.63	0.03	2.69	-2.66
Sintex Ind	14.99	19.60	-4.61	92.95	108.20	-15.25
Sunflag Iron & Steel	4.29