Mid, small-caps race ahead of fund managers

Average scheme returns lag growth of indices

Most equity mutual fund managers have failed to generate benchmark-beating returns in the mid-cap and small-cap categories.

The mid-cap and small-cap indices have rallied 19 per cent and 25 per cent, respectively, since April. In comparison, category average returns for mid-cap- and small-cap oriented schemes are 16.6 per cent and 19.5 per cent, respectively.

This underperformance of up to five percentage points might hurt mutual fund investors, who expect fund managers to generate returns at least in line with the market. However, four months is too short to judge any scheme’s performance.

“Several stocks have rallied on exuberance. We as fund managers abstain from investing in stocks without any rational basis,” said the chief investment officer (CIO) of a foreign fund house.

Adding: “A gush of liquidity has made many stocks run up. In the short term this may reflect negatively on the industry performance. If the liquidity situation reverses, some of these stocks might see sharp corrections.”

In the large-cap segment, however, fund managers have performed in line with the indices. The average return for this category since April is 12.6 per cent. The Nifty and Sensex have risen 11.6 per cent and 10.7 per cent, respectively, over this period.

Some fund managers said their underperformance was due to gains in public sector banks, a segment they were wary of.

The majority of fund managers have been underweight on public sector companies, particularly banks. Fund managers have also been light on metals and mining, another segment that has made sharp gains.

Government-owned banks like State Bank of India, Punjab National Bank and Bank of Baroda have rallied between 10 per cent and 55 per cent since April. The BSE PSU Index has risen 18 per cent and the Metal Index 24 per cent in four months.

RAJIV SHASTRI, Managing director of Peerless Mutual Fund

“The short-term behaviour has little to do with the long-term performance of schemes. At times, the market surprises fund managers,” said Rajiv Shastri, managing director of Peerless Mutual Fund.

“There are stocks not worth accumulating. As long as fund managers are disciplined, such short-term underperformance has no relevance,” he added.

Equity mutual fund assets are at an all-time high, after a sharp rally in the broader market.