Midcap and small caps have been the prime victims of the on-going turmoil in the Indian equity markets. Many midcap stocks witnessed sharp correction in their values in the last one and a half year. However, underperformance in the short-term is one of the key traits of midcaps and if chosen carefully, they can potentially grow at a faster pace than the large sized counterparts.
L&T Midcap Fund is one such fund that looks to benefit from the high growth potential of the midcap category by deploying careful stock picking techniques.
Launched in August 2004, the fund had a total asset under management of Rs 4,905 crore as on August 31, 2019. It is managed by Mr S.N. Lahiri (since June 2013) and Mr Vihang Naik (since June 2016).
Investment objective: L&T Mid-cap Fund aims to generate capital appreciation by investing primarily in midcap stocks.
Graph 1: Growth of Rs 10,000, If Invested In L&T Midcap Fund 5 Years Ago
An investment of Rs 10,000 in L&T Midcap Fund five years back on September 10, 2014 would have grown to Rs 17,283 as on September 09, 2019. This translates into compounded annualised growth rate of 11.56%. In comparison a simultaneous investment of Rs 10,000 in its benchmark Nifty Midcap 100 – TRI would now be worth Rs 14,192 (a CAGR of 7.25%). As can be seen in the chart alongside, the fund has generated substantial lead over the benchmark, right from the year 2014 to 2018.
Graph 2: L&T Midcap Fund Year-on-Year Performance
Launched in August 2004, L&T Midcap Fund has a track record of over 15 years. The year-on-year performance comparison of the fund vis-à-vis its benchmark Nifty Midcap 100 – TRI shows that the fund performed exceedingly well and surpassed the index in all the last 10 calendar years, except in CY 2012.
The fund outpaced the benchmark by an impressive 24 percentage points in CY 2014, while in CY 2015, 2016 and 2017 too, the outperformance was significant. The fund managed to cushion the downside in CY 2018 when many midcap stocks were bleeding. As the crash in midcaps continues in the current year, the fund is trying to contain the downside. Notably, L&T Midcap Fund has generated an alpha of over 3 percentage points in most of the calendar years.
Table 1: L&T Midcap Fund Performance vis-à-vis category peers
| Scheme Name | Corpus (Cr.) | 1-year (%) | 2-year (%) | 3-year (%) | 5-year (%) | Std Dev | Sharpe |
| L&T Midcap Fund | 4,905 | -9.01 | 6.96 | 14.51 | 22.10 | 15.96 | 0.01 |
| Axis Midcap Fund | 2,819 | 4.63 | 14.62 | 14.00 | 19.55 | 14.10 | 0.07 |
| Sahara Midcap Fund | 7 | -7.03 | 4.72 | 13.67 | 17.17 | 16.19 | 0.00 |
| Invesco India Midcap Fund | 485 | -1.12 | 9.86 | 13.38 | 20.42 | 15.83 | 0.02 |
| DSP Midcap Fund | 5,921 | -5.62 | 5.56 | 12.97 | 19.92 | 15.54 | -0.01 |
| Kotak Emerging Equity Scheme | 4,470 | -5.91 | 6.03 | 12.93 | 22.47 | 15.64 | -0.01 |
| HDFC Mid-Cap Opportunities Fund | 20,944 | -7.18 | 5.43 | 12.55 | 19.62 | 15.80 | -0.04 |
| Taurus Discovery (Midcap) Fund | 46 | -7.09 | 7.05 | 12.25 | 17.96 | 16.26 | -0.04 |
| Franklin India Prima Fund | 6,694 | -4.42 | 6.33 | 11.83 | 20.01 | 14.25 | -0.04 |
| Reliance Growth Fund | 6,232 | -4.41 | 6.74 | 11.69 | 16.01 | 15.65 | -0.01 |
| ICICI Pru Midcap Fund | 1,648 | -6.64 | 6.36 | 11.67 | 19.08 | 15.24 | -0.02 |
| Edelweiss Mid Cap Fund | 861 | -9.31 | 6.85 | 11.13 | 20.09 | 16.76 | -0.01 |
| Tata Mid Cap Growth Fund | 674 | -3.88 | 6.63 | 10.53 | 19.10 | 17.49 | 0.00 |
| Sundaram Mid Cap Fund | 5,420 | -11.28 | 2.08 | 9.76 | 18.80 | 16.30 | -0.08 |
| Aditya Birla SL Midcap Fund | 2,174 | -11.22 | 2.20 | 9.25 | 17.65 | 16.45 | -0.09 |
| BNP Paribas Mid Cap Fund | 698 | -9.28 | 3.61 | 8.80 | 17.57 | 16.52 | -0.05 |
| Baroda Mid-cap Fund | 44 | -10.03 | 3.92 | 8.22 | 5.76 | 16.10 | -0.06 |
| UTI Mid Cap Fund | 3,422 | -11.07 | 2.57 | 7.66 | 18.21 | 16.93 | -0.09 |
| Motilal Oswal Midcap 30 Fund | 1,414 | -6.37 | 1.83 | 7.49 | 16.17 | 16.65 | -0.07 |
| Quant Mid Cap Fund | 10 | -2.36 | 7.48 | 6.99 | 9.91 | 12.73 | -0.09 |
| PGIM India Midcap Opp Fund | 110 | -10.30 | 1.32 | 6.45 | 10.46 | 16.66 | -0.11 |
| SBI Magnum Midcap Fund | 3,290 | -10.70 | -0.48 | 5.85 | 17.14 | 16.36 | -0.13 |
| Nifty Midcap 100 – TRI | -10.47 | 3.03 | 10.36 | 15.85 | 18.63 | -0.06 |
Returns are on a rolling basis and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
(Data as on September 11, 2019)
(Source: ACE MF)
*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.
L&T Midcap Fund outperformed the benchmark and average category returns with significant margin in 2-year, 3-year and 5-year rolling period. However, in the 1-year rolling period the fund trailed the average category returns, though it managed to perform slightly better than the benchmark.
The fund was the top performer on a 3-year and 5-year rolling return basis, standing ahead of other category performers like Axis Midcap Fund, Invesco India Midcap Fund, DSP Midcap Fund, Kotak Emerging Equity Scheme, HDFC Mid-Cap Opportunities Fund and so on.
In terms of risk-return parameters, L&T Midcap Fund took reasonable amount of risk, far lower compared to the benchmark. Regardless, the scheme managed to generate better risk-adjusted returns compared to most of its peers.
Investment strategy of L&T Midcap Fund
The scheme primarily invests in equity and equity related instruments of midcap companies. It invests in a well-diversified portfolio of stocks with individual stock positions not exceeding the range of 3-4%. The fund follows bottom-up stock picking approach to pick scalable businesses having strong competitive advantage and which are available at reasonable valuation levels. The overall structuring of the portfolio is aimed at controlling risk at moderate level.
L&T Midcap Fund actively looks for investment opportunities arising out of-
(a) Shift from unorganized to organized sector and
(b) Significantly higher growth of certain smaller sectors of the economy
Graph 3: L&T Midcap Fund Portfolio Allocation And Market Capitalisation Trend
L&T Midcap Fund is mandated to invest 65% of its assets in equity and equity related instruments of mid cap companies. The fund allocates around 66% of its asset towards mid caps. In the last few months, the fund increased its allocation towards the more stable large caps, whereas the allocation to the high risk small caps was reduced. The fund currently maintains around 10% of its holdings in large-caps and around 16% in small caps. The balance holding is maintained in the form of cash.
Graph 4: L&T Midcap Fund Top Portfolio Holdings
Holding (in %) as on August 31, 2019
(Source: ACE MF)
As on August 31, 2019, L&T Midcap Fund held 79 stocks in its portfolio diversified across range of sectors. The top 10 stocks constitute 23.8% of the total holdings; of this major allocation is towards Cement industry. City Union Bank has the allocation of 3.6% in the portfolio, closely followed by The Ramco Cements (2.9%). Rest of the stocks in the top 10 holdings have allocation of around 2% each.
In terms of sector wise holdings, the fund has the maximum exposure to Engineering at 11.6%, followed by Finance (11.2%) and Banking (9.7%). The next highest allocation is towards Cement (9.1%). Construction and Chemicals carry an allocation of 5.9% each. Consumption, Auto Ancillaries, Pharmaceuticals and Hotels are the other prominent sectors in the portfolio.
Top Contributors
Among the stocks in the fund’s portfolio, Berger Paints India contributed the most to its gains in the last one year, with a weighted return of 0.3%. Vinati Organics, Oberoi Realty, Godrej Properties and Aarti Industries were the other top contributor to its returns.
The stocks that eroded portfolio gains the most were RBL Bank, Emami, Exide Industries, Sundaram Fasteners, Jindal Steel & Power, Varroc Engineering , Indian Bank, Mindtree, ISGEC Heavy Engineering and so on.
Suitability of L&T Midcap Fund
L&T Midcap Fund invests majority of its portfolio in under-owned and under-researched midcap stocks. Midcaps are likely to be the key beneficiaries of the government’s thrust to formalise large part of the economy and the fund looks to capitalise on this change.
These stocks can potentially beat large caps in the long-term, though they can be highly volatile in the short-term. Thus, it is a suitable bet only for aggressive investors having appetite for higher risk with an investment horizon of 5 years or more.
L&T Midcap Fund has a track record of rewarding investors well over longer time periods. It has outpaced the benchmark and category peers by a noticeable margin in the past and has the potential to continue with its superior long term performance.
Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
This article first appeared on PersonalFN here.
