MFs focus on large-cap in Q2, markets bet on public sector companies

Fund managers say PSUs look attractive as valuations are cheap and possibility of strategic sales offers room for value unlocking

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

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

“We believe opportunities have emerged in mid- and small-caps post 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.

In line with the definition laid down by the Association of Mutual Funds in India, entities with market cap exceeding Rs 28,000 crore were considered large-caps and those from Rs 8,800-28,000 crore considered mid-caps. Among large-caps, MFs seemed to be in favour of public sector undertakings (PSU) and privately-owned financial players.

MFs’ stake in general insurance player ICICI Lombard rose 414 basis points (bps) in Q2. In ICICI Bank and Housing Development and Finance Corporation, their stakes rose 177 bps and 125 bps, respectively.

State-owned oil marketing companies 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 as valuations are cheap and the possibility of strategic sale offers room for value unlocking. 

Within mid-caps, fund managers are showing appetite for firms oriented towards domestic consumption.

For instance, MFs’ stake in Crompton Greaves Consumer Electricals rose 230 bps to 18.57 per cent. Further, MFs’ stake in Jubilant Foodworks inched up to 13 per cent, from 11.17 per cent in Q1.

While fund managers 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 one 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 small-cap 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.

On a year-to-date basis, the BSE Midcap is trading 3.5 per cent lower, while the BSE Smallcap is down close to 8 per cent. The benchmark Sensex has risen above 10 per cent during the same period.