Flexicap, multicap schemes maintain large-cap skew amid global uncertainty

Flexicap and multicap schemes— which have the mandate to buy shares across small-, mid- and large-cap universes—are playing it safe amid an uncertain global environment. Schemes in these categories are maintaining a skew towards large-caps while maintaining a bare minimum allocation to small-caps.

Large cap companies are known to weather the market storm better, while smaller stocks tend to fall more during volatile market conditions.

An analysis of flexicap portfolios shows that large-cap stocks account for 66 per cent of these schemes while small-caps hardly cross 10 per cent. Similarly, multicaps are just maintaining the bare minimum 26-27 per cent allocation in small- and mid-cap stocks, while large-caps make up 42 per cent of the portfolios.

Multicap funds are required to invest at least 25 per cent in each of large-cap, mid-cap and small-cap stocks. There is no such threshold for the flexicaps.

Fund managers say the allocation is bound to be tilted in the favour of large-caps in a rising rate environment and the lingering slowdown risk.

"The domestic economy is facing a slowdown risk amid rising interest rates and macro uncertainty. In such a scenario, the risk is higher for smaller companies compared to the larger ones," said Amit Ganatra, Head of Equities, Invesco Mutual Fund. According to Ganatra, the comparatively higher valuation of mid-caps is also a factor behind the large-cap bias.

The popularity of flexicap schemes also comes in the way of higher small-cap allocation. Given the sheer size of some of the schemes, it's not possible for fund managers to allocate a high percentage to small caps without taking liquidity risk.

This is probably why the Kotak Flexicap fund, which is the largest active equity scheme with an AUM of Rs 36,000 crore, has the lowest allocation (in percentage terms) to small cap stocks at 1.5 per cent.

"Multicap and flexicap funds have become sizeable. Hence, having too much allocation to small-caps can create a problem when the market goes down," said Vijai Mantri, Co - Founder and Chief Investment Strategist at JRL Money.

"For a large-sized fund, it's prudent to take liquidity into consideration when investing. A fund manager should always maintain a liquidity buffer," said Sonam Udasi, senior fund manager at Tata Mutual Fund.

Another important aspect is the index composition. Active fund managers often face criticism for keeping their portfolios aligned with the index to avoid significant under-performance. This aspect of active fund management called 'index hugging' may be at play in the case of these two fund categories.

The S&P BSE 500 Total Return Index (TRI), which is the benchmark of flexicap schemes, is also very heavy on the large-cap side. The index is over 75 per cent large-cap and 8-10 per cent small-cap.

"When a fund drastically under-performs, inflows dry up. So a lot of fund managers try to be on the safer side by hugging the benchmark. The strategy helps curtail volatility and maintain consistency in returns," said Rushabh Desai, founder of Rupee with Rushabh Investment Services. "The lower volatility on account of large-cap bias and the kick in returns from small-cap and mid-cap allocation is also the reason why MF distributors and advisors pro-actively recommend flexicap funds," he added.

Multicap funds are benchmarked against Nifty500 multicap 50:25:25, which caps the total weight of large caps at 50 per cent and 25 per cent for mid-caps and small-caps. The average allocation of multicap funds is in line with the allocation pattern of the benchmark.

As per Value Research, the S&P BSE 500 TRI has gone up 19 per cent compounded annual growth rate CAGR) in the last 3 years (as on October 13). 20 out of 52 schemes were able to beat the benchmark with the best performing scheme delivering 38 per cent CAGR and worst performing scheme growing at 10 per cent CAGR.

Flexicap schemes have gained currency after active large-cap schemes started to struggle in generating alpha. The flexibility to invest in any company irrespective of their market size has helped the fund category to beat the active large-cap returns in the three-year period. While the average large-cap fund returns stand at 15.6 per cent, flexicap funds have delivered 17.3 per cent.

Top funds in these two categories have delivered over 20% CAGR in 3 years

Multicap Funds	3-year Return (CAGR)
Quant Active	37
Mahindra Manulife Multicap Badhat Yojna	26
Nippon India Multicap	22
Baroda BNP Paribas Multicap	22
Invesco India Multicap	20
Flexicap Funds	3-year Return (CAGR)
Quant Flexicap	38
PGIM India Flexicap	26
Parag Parikh Flexicap	25
HDFC Retirement Savings Fund	23
Nippon India Focused Equity Fund	23

Returns as on October 14