- Midcap equity fund
- Steady performer, adept stock-picking skills that delivers upside and contains downsides
- High-risk investors with a minimum 5-year timeframe
If you are an aggressive investor and building a long-term portfolio, this may be a good time to invest in a midcap fund like Kotak Emerging Equity. This aggressive fund sported a smallcap profile a couple of years ago. It cut back its smallcap exposure in 2017 and then categorized itself as a midcap fund in 2018 when SEBI’s new categories were announced. The timely move also prevented the setback that many small caps faced from the sharp correction in 2018.
The correction in the midcap and smallcap space in 2018 (Nifty Midcap 100 fell by 15% and Nifty Smallcap 100 by 29%) provides a good opportunity with relatively lower risks to enter an aggressive fund like Kotak Emerging Equity. Over a 5-year time, the fund delivered 21.3% annually, beating its benchmark by 5.5 percentage points and peers by 4.5 percentage points. This return has transpired partly because of its earlier portfolio of smallcap stocks. Investors would, therefore, need to tone down their return expectations now.
Kotak Emerging Equity is a riskier fund than the other midcap funds we suggest. For example, Franklin India Prima has lower volatility and contains declines better than this fund. Also, Kotak Emerging Equity invests in smaller companies in the midcap space compared with Franklin India Prima. Similarly, it held lower cash than L&T Midcap even in corrective phases.
This fund should, therefore, be your aggressive option in the midcap category. You need a minimum 5-year time frame. Investing about a fourth of your planned investments as lump sum followed by SIPs/STPs would be a good option now.
Kotak Emerging Equity has been a steady performer over the years. It beat the Nifty Midcap 100 TRI 62% of the times when 1-year returns were rolled daily in the past 3 years. This compares well with the category average of just 36%.
Returns as of April 23, 2019
Over longer periods of 3 years, the fund also scores well in terms of the margin of outperformance over the benchmark. 3-year rolling returns rolled daily over the last 5 years shows that the fund outperformed its benchmark by an average 5.7 percentage points. Kotak Emerging Equity is also good at containing downsides (as shown by downside capture ratio) compared with the category. In the bear onslaught in 2018, while peers like L&T Midcap took cash exposure to contain downsides better, this fund managed to hold its ground with limited declines, despite being fully invested in equities. This can be attributed to stock-picking skills.
Kotak Emerging Equity has about 20% on an average (past 1 year) in smallcap stocks and about 68% in midcap stocks. Its smallcap holding is marginally higher than peers thus lending aggression to the portfolio.
While stocks in the banking & financial services sector and engineering and construction space are held across many midcap funds, Kotak Emerging Equity picked some unique sectors as well as stocks. For example, it had high weight to a lot of chemicals sector, and this worked in its favour as strong earnings backed by international demand aided this sector. One of its top holdings, a chemical play called PI Industries, was bought in April 2018. This stock bucked the falling trend in the mid and small cap space and started delivering handsome returns from October 2018. It also timed its additions in Coromandel International, Supreme Industries and Atul, all of which have rallied in the past 6 months.
|Top 10 holdings||% of Net Assets||Shares added/reduced in last 6 months|
|The Ramco Cements||3.41||Added|
|P I Industries||3.21||Added|
|Bharat Financial Inclusion||3.04||Reduced|
|AU Small Finance Bank||2.95||Added|
The fund was quick to spot the uptick in other stocks too, in the fall of last year. It accumulated its holdings in stocks such as Indraprastha Gas, RBL Bank and SRF and benefited from the rally in the last 5-6 months in these stocks. It also quickly booked profits by partly exiting stocks such as Atul, Federal Bank and RBL Bank when it saw returns on the table. The fund was not too lucky with some of its largecap holdings as it exited Bajaj Finance (in September 2018 when the NBFC crisis began) and before that ICICI Bank and lost out on returns that came by later in these stocks.
But the fund has been patient with quality small and midcap stocks that did not deliver last year. It patiently added stocks such as Amara Raja batteries, AU Small Finance Bank, Thermax, Finolex Cables and Future Retail.
One other factor, besides stock-picking acumen, that may have helped this fund deliver is the liquidity of its portfolio. According to data from MFI explorer (ICRA), the fund’s stock portfolio takes around 17 days to liquidate (based on individual stock liquidity in the market) while it is 50 days for HDFC Mid-cap Opportunities. Kotak’s liquidity is commendable given that it has a higher proportion of small and midcaps compared with peers. High liquidity ensures that ‘profits in the paper’ are quickly translated to ‘real profits’ and not much is lost in the process.
The fund is managed by Pankaj Tibrewal. It has ₹4091 crore of assets.