MFS keep large-cap focus in Q2

Domestic fund managers, managing over ~7 trillion in equity assets, are keeping their faith in large-caps, while initiating select buying in the mid-cap segment.

Compared to Q1, mutual funds (MFS) raised their stakes in 69 large-cap firms, while trimming exposure in 29, showed an analysis of shareholding pattern for the September quarter (Q2). Among mid-caps, MFS increased their position in 77 firms and pruned stake in 57 firms.

“Opportunities have emerged in mid- and small-caps after the steep corrections. While the broader market is likely to remain volatile, our focus will remain on firms with well-defined niches and strong moats,” said Jinesh Gopani, head (equity), Axis AMC.

According to the Association of Mutual Funds in India, entities with market cap exceeding ~28,000 crore are considered large-cap, and those from ~8,800-28,000 crore considered midcap. Among large-caps, MFS seemed to be in favour of public sector undertakings (PSUS) and privately-owned financial players. MFS’ stake in general insurance player ICICI Lombard rose 414 basis points (bps) in Q2. In ICICI Bank and HDFC, their stakes rose 177 bps and 125 bps, respectively.

Bharat Petroleum and Hindustan Petroleum saw holdings by MFS rise 243 bps and 195 bps, respectively. Among other PSUS, MFS’ stake rose in Coal India (186 bps) and NTPC (173 bps).

Fund managers say PSUS look attractive, given valuations are cheap and the possibility of strategic sale offers room for value unlocking. Within mid-caps, MFS are showing appetite for firms oriented towards domestic consumption.

For instance, their stake in Crompton

Greaves Consumer Electricals rose 230 bps to 18.57 per cent, while that in Jubilant Foodworks edged up to 13 per cent, from 11.17 per cent in Q1.

While MFS are making select bets in the mid-cap segment, MF investors have seen disappointing returns in mid- and small-caps, of late. Over the past year, mid-cap schemes have given returns of 6 per cent, whereas frontline market indices have given returns of 13-15 per cent. For small-cap schemes, one-year returns have been under 1 per cent.

Fund managers reckon a broader market rally is on the cards, which could sharply push up returns of mid- and small-cap schemes. “The divergence between the Nifty and mid- and smallcap indices is at historical extremes. Broader markets tend to outperform for 18-24 months after such extremes are reached,” said Pankaj Tibrewal, fund manager at Kotak Mutual Fund.

The BSE Midcap is trading 3.5 per cent lower, and the BSE Smallcap 8 per cent down year-to-date. The Sensex has risen above 10 per cent YTD.