Mutual funds load large-caps, reduce small-caps in first quarter

Expensive valuations and re-categorisation norms have led to churn in mutual fund (MF) holdings, with money flowing out of mid- and small-caps and moving into large-caps, an analysis of latest shareholding data shows.

In the June quarter, MFs’ ownership of large-caps rose 120 basis points (bps) from the levels they held in the September quarter, before the market regulator issued a circular on re-categorisation. 

Meanwhile, ownership levels in mid-caps inched up 90 bps, while that in small-caps reduced 10 bps. However, on an individual basis several companies in the small-cap universe saw MF holdings come down during the June quarter. For instance, MF holding in Jet Airways and Fortis Healthcare reduced 326 bps and 257 bps, respectively, from the previous quarter.

According to Vidya Bala, head of MF research at FundsIndia, by mid-2017 some fund managers had become cautious as mid- and small-caps had seen quite a bit of run-up and were trading at expensive valuations. 

“After the Securities and Exchange Board of India (Sebi) directed the industry to make sure all the schemes are true to label, lot of money was taken out of mid- and small-caps,” she added.   

The June quarter was one of the most turbulent for the small- and mid-cap companies. After rallying eight per cent in April, they fell sharply in the next two months. 

The Nifty Midcap 100 index had dropped seven per cent and four per cent in May and June, respectively, while the Nifty Smallcap 100 index fell seven per cent and eight per cent, respectively, in the same period. Interestingly, the benchmark Nifty 50 was unchanged between May and June, consolidating its six per cent gain from April.

Collective institutional selling by foreign portfolio investors (FPIs), MFs and insurers in small-caps explains the significant underperformance, says a note by ICICI Securities.

“Although the selling in small-cap stocks triggered by a plethora of reasons, including their unsustainable run in 2017, significant valuation premium over large-caps and the emergence of volatility and risk-off environment in February, it is clear it got further accentuated by lack of buying support, low liquidity and selling by all the three large class of Institutional investors,” says the brokerage.

Based on an analysis of June shareholding data, ICICI Securities says FPIs, MFs and insurers have sold small-cap stock worth $1.1 billion during the first half of 2018.

MFs also seem to be changing their investment strategy. MFs’ holding in corporate lenders such as SBI and ICICI Bank, which are facing asset quality concerns, rose to life-time high of 11.92 per cent and 23.22 per cent, respectively, during the June quarter.