Mid & small-cap equity schemes under pressure

Despite compelling valuations, fund managers prefer large-cap stocks over small-caps.

Mutual Fund equity schemes in the mid & small-cap space are under pressure. With excessive damage in equity markets over the last six months, investors have earned a negative return of as high as 23 per cent during the period in the category.

Fund managers say none would, in current situation, want to own stocks of mid & small-cap companies, despite compelling valuations. Given the pressure on their profitability on the back of high interest rates and diminishing margins among several other negative factors, it’s better to bet for large caps, say asset managers.

HOW THEY COMPARE SIX-MONTH RETURNS
Category
Equity: Mid & Small Cap	-11.38
Indices
BSE Mid Cap	-16.68
BSE Small Cap	-25.71
BSE Sensex	-12.34
Mid & small cap schemes which are among worst performers
HSBC Small Cap	-21.88
HSBC Midcap Equity	-19.74
ICICI Prudential Midcap	-15.20
Principal Emerging Bluechip	-14.76
Reliance Small Cap	-13.60
(As on Nov 22)                                         Source : Value Research Online

Though they don’t see abnormal redemption pressure from retail investors as of now, high networth individuals (HNIs) have started redeeming as markets crash.

For instance, the average category return for mid & small-cap funds is 11.4 per cent. This is at a time when BSE mid-cap index has lost close to 17 per cent while small-cap index has witnessed an erosion of one fourth of its value during the period.

The worst performing schemes in this category include HSBC’s small-cap as well as mid-cap equity funds, ICICI Prudential MidCap, Reliance Small Cap, Principal Emerging Bluechip and Franklin India High Growth Companies.

“There is no depth and liquidity in the mid & small-cap space currently,” notes chief investment officer (CIO) of a foreign fund house. “This is affecting the stocks and are best avoided for the time being.”

According to market experts, the issue of corporate governance, pledged shares and high leverage are taking a toll on the companies in this space. “At a time when questions are being raised on the balance sheets of the (mid & small cap) companies, one does not know where the bottom is,” shrugs Ambareesh Baliga, chief operating officer of Way2Wealth Securities.

Moreover, fund managers have a clear preference for large-cap stocks in such markets. According to Vetri Subramaniam, head of equity at Religare Mutual Fund, the mid-cap stocks’ current attraction notwithstanding, the discounts are not significant compared with large caps.

Interestingly, so far this month, fund houses have turned out to be net buyers of equities worth Rs 219 crore after two months of continuous selling. This indicates that buying in the mid and small cap has taken a back seat, rather large-cap stocks are being picked. During September-October period, fund managers had sold shares worth over Rs 1,000 crore.

Agrees the CIO of the foreign fund house: “Stocks of small & mid cap companies have taken a beating this year. If markets, by any chance, recovers we expect to see sharp bounce back in this space. However, the large-cap stocks will be the first to recover as they have lost considerable value.”