 "Mid, small cap funds continue to disappoint investors amid market meltdown")
Active midcap and smallcap mutual fund (MF) schemes, which generally outperform their benchmarks with ease, have lagged behind them in the ongoing rally. This has happened because of multiple factors such as the underperformance of their largecap allocations and a sharp rally in some sections of the market where active fund managers have limited exposure.
In the last six months, passive funds tracking the Nifty Midcap50 and Nifty Midcap100 indices have been the top performers among all the midcap offerings, delivering around a 32 per cent return. In the smallcap space, Nifty Smallcap50 index funds lead the race with returns of over 36 per cent.
According to fund managers and analysts, active funds’ performance took a hit on account of a comparatively smaller rally in the largecap segment. Market-cap oriented schemes maintain significant allocations in m-cap segments other than their primary domain to diversify their portfolios. For example, smallcap and midcap schemes invest around 20 per cent of their corpus in largecap stocks.
The Nifty50 total return index (TRI) has gone up close to 16 per cent in the past six months vis-a-vis a 36 per cent rise in the Nifty Smallcap50 TRI.
“The largecap segment has underperformed the smallcap and midcap segments by 15-19 percentage points in this period, creating a temporary performance drag,” said Manuj Jain, co-head (product & strategy), WhiteOak Capital AMC.
The other reason, experts pointed out, was that most fund managers had nil-to-small allocations in some of the top drivers of the benchmarks.
“If you look at the mid and smallcap side of the market, the older economy has done well, with the power, capital goods, railway and defence sectors being some of the examples. In addition, some of the non-quality stocks have been among the key drivers of the indices. Our investment framework does not allow us to own most of these stocks,” said Niket Shah, fund manager, Motilal Oswal MF.
Most fund managers are underweight on PSUs for various reasons, from weaker management to slower growth.
In recent months, PSU stocks have taken the lead in most market segments. The S&P BSE PSU index is up 29 per cent in the last six months, driven primarily by optimism around the government’s infrastructure and capex push ahead of key elections.
Some high performing non-PSU stocks may also have dented the performance. “There are certain stocks that do not find favour with fund managers due to corporate governance issues. If these stocks perform well, the funds fall behind their benchmarks,” said Rahul Jain, president and head, Nuvama Wealth.
However, fund managers and advisors see the underperformance as a short-term phenomenon. They expect active funds to regain the edge “once the froth settles”.
“As the market corrects and some of the froth goes away, active funds’ performance vis-a-vis their benchmarks will improve,” Shah said.
While active largecap funds have struggled to beat their benchmarks in recent years, the majority of the midcap and smallcap funds have continued to outperform across timeframes. Despite the recent struggle, 50 per cent of the active midcap schemes have delivered higher returns than the Nifty Midcap 100 TRI in a three-year period. For a five-year timeframe, the ratio surges to 64 per cent.
The longer-term performance record of active smallcap schemes is even better. Over 80 per cent of the active smallcap schemes outdid the Nifty Smallcap250 in a three-year period.
Interestingly, it’s active largecap funds that have fared better in the current rally than their recent track record. In a six-month period, close to 90 per cent of the active largecap funds have delivered better returns than the most popular largecap passive offering — the Nifty50 index funds.
