Insights

“If current momentum in the market is sustained, midcaps should do better”

April 28, 2014 . Vidya Bala

With the mid-cap indices on a roll over the last 6 months, what are the prospects of this segment and what should one look for in the space? We ask these questions to R Srinivasan, Fund Manager & Head Equities, SBI Mutual as the fund house has quite a few funds invested in this market-cap segment.

Read on to know the strategy behind some of the popular funds such as Emerging Businesses and Magnum Global, all from the SBI stable.

Excerpts: 

mr. Srinivasan - 1

Mid- and small-cap indices have been prolonged underperformers (but for the recent rally). Does their valuation provide comfort or are you still cautious on certain segment there?

We do not look at mid caps as a segment. Our definition of mid-and-small-caps is anything that is not the top 100 (in terms of market cap rank). This makes the underlying universe not only very large and also extremely diverse in terms of its characteristics, which is also borne out from the range of risk-return.

Having said that, common sense suggests that mid caps, being higher beta as a group, should out-perform rising markets and under-perform falling markets. If the current momentum in the markets is sustained, mid caps should do better.

From a valuation perspective, the mid cap index is surely trading at a discount to the large cap but that has been so historically due to underlying risks. Specifically, coming to stocks, there are enough out there that are trading at attractive valuations, liquidity being the only constraint.

Would you be comfortable with mid-cap companies that are somewhat leveraged but can benefit from operating leverage soon or would you still tread cautiously with debt laden balance sheets?

We would be comfortable with leverage only when there is strong visibility of a reversal driven by balance sheet cash flows. It is tough to find cases where the profitability delta can meaningfully change the leverage position in a shorter term time frame.

Many fund houses have gradually shifted assets to cyclical sectors that can be expected to do well if there is a pick up. We still see the Emerging Businesses Fund overweight on sectors such as FMCG. Are you skeptical about the turnaround in sectors such as capital goods, energy or infrastructure? If so, what are the challenges? 

Emerging Business is run as a concentrated conviction strategy, the conviction aspect relating to both return expectations and risks. It is completely bottom up and any sector exposures are purely a deviation of the underlying stock picks.

We do play long themes but that is not necessarily sector driven. As a corollary, we do not indulge in sector rotation or play events like the upcoming elections. It is also pertinent to note that the overweight is not on FMCG but on Consumer Discretionary which is a diversified basket with different growth drivers.

We are definitely sceptical but at the same time we are also optimistic on the probability of a turnaround given that cyclicality from a mean reversion  perspective is in your favour and a strong government at the Centre has the ability (we hope!) to catalyse positive change.

SBI Magnum Global has seen a pick up in  performance after a hiatus. Was there a conscious change in strategy in this fund?

SBI Global is a quality mid cap strategy that is focused on downward protection in flat to falling markets and reasonable capital appreciation in rising markets. The ‘quality’ focus reduces volatility and the ‘mid cap’ focus should generate above average returns over the mainstream indices over a longer term. We have been very consistent with this strategy over the last 4-5 years and there is no change. In addition to stock selection, the fact the fund has done well may also be attributed to the quality component of the market doing much better than the rest.

Besides SBI Magnum Global, you have a midcap and a small & midcap fund in the SBI stable. How does an investor differentiate between them?

SBI Global is a quality midcap fund. Quality is a necessary characteristic. The Midcap fund may or may not be focused on quality. The Small cap Fund runs a minimum exposure of 50% on small caps which is nearly one-tenth the midcap cut-off and hence very different.

What would be the sectors that you would be bullish on, given the current scenario?

As a house, our top over weights are in Healthcare, Consumer Discretionary and Industrials. Under weights are Consumer Staples and Materials.

Disclaimer:

The sector(s)/stock(s) mentioned here do not constitute any recommendation of the same and SBI Mutual may or may not have any future position in these sector(s)/stock(s). Past performance may or may not be sustained in the future. The portfolio of the scheme is subject to changes within the provisions of the Scheme Information document of the scheme. Please refer to the SID for investment pattern, strategy and risk factors.

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