Monday, June 22, 2009

Sundaram Select Midcap: A good investment bet

The hardest hit has been the fastest on the road to recovery. Midcap stocks, that were battered post the global market meltdown, have now
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silenced all critics. The worst performers of 2008 are among the best this year. When stocks are doing well, mutual funds ought to be the direct beneficiaries. So has been the case with Sundaram BNP Paribas Select Midcap. One of the finest midcap performers in the mutual fund space, this fund is also the largest with assets of over Rs 1,100 crore.

PERFORMANCE:

A quick glance at the performance chart and it is evident that this fund has not only moved in sync with its Benchmark Index – BSE Midcap for most of its tenure, but has clearly outperformed it on a number of occasions - the latest being the current market rally. Having performed better than BSE Midcap during the downturn, Select Midcap has infact outperformed it in the past three months. The fund has generated whopping 73% returns since April ‘09, against the BSE Midcaps’ 67%. These returns are also way ahead of the Sensex and the Nifty, which returned about 47% and 42% respectively during this period.

Select Midcap has had an edge over its benchmark index on a year-on-year basis since its inception. Even during last year’s global financial crisis, it gave returns of - 59% against BSE Midcaps’ -67 %. However, being a hard core midcap, the fund failed to beat the large cap indices – the Sensex and the Nifty were down by about -52 % during the period. The fund thus justifies its high portfolio beta of 1.18, which implies returns that are 18% higher vis-à-vis the market in an upturn and 18% lower in a downturn.

While restricting the fall in the downturn is commendable, the fund’s finest performance till date dates back to calendar year ‘06 when it returned a whopping 58% while the BSE Midcap, the Sensex and the Nifty trailed far behind at 29%, 47% and 40% respectively. The equity diversified category gave meagre average returns of about 35% then. While the fund has had decent performances thereafter, a repeat of the feat of ‘06 is keenly awaited.

PORTFOLIO:

A midcap fund is meant for investors with a high-risk appetite, especially those who would remain unperturbed by severest market volatilities. The rewards would be immense during booming times. Select Midcap’s portfolio has a bias towards risk, with more than 60% of its equity portfolio invested in midcap stocks. However, the fund is immensely diversified. It has nearly 56 stocks in its kitty and the exposure to a single scrip is limited to less than 5%. The top 10 stocks thus account for a mere 33% of portfolio’s equity composition. While such diversity is desirable to mitigate the stock specific risk, it becomes difficult for fund manager to manage and keep track of such a huge basket.

The fund’s aggressive strategy compels it to be fully invested in equities. But it drastically reduced its exposure amid the market turmoil. The fund has had about 20% - 30% cash in its portfolio since the beginning of 2008, albeit fluctuating widely between months. This also suggests that the fund has been aggressive in churning its portfolio.

A look at the sectoral composition and it is easy to decipher the fund’s play on the market momentum. With the entire Indian economy singing the infrastructure song, Select Midcap is not far behind. The fund has drastically increased its exposure to the construction and energy sectors in the past two months, allocating about 34% of its portfolio to these two sectors alone. While earlier these sectors commanded a portfolio share of about 10%-15 % ,the same has been increasing gradually since the beginning of this financial year. This increase , however, has been at the cost of industrial manufacturing sector which has been drastically cut from the portfolio over the past year and a half. However, one sector where the fund has maintained a clear bias is the financial services space.

OUR VIEW :

A pure equity diversified fund, with a clear emphasis on the midcap space, Select Midcap is meant for bravehearts . While the fund’s performance till date has not raised any alarms, risk-averse investors would do well to stay away and rather be invested in large-cap or multi-cap funds. However, for those who are clued to market trading and not anxious of the pitfalls, Sundaram BNP Paribas Select Midcap is probably the place to be in.

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