Mid-cap stocks continue to outshine large-cap peers despite the strong second wave of COVID-19. The S&P BSE Midcap index is up 19% on YTD basis, while the S&P BSE Sensex rose 4.5% during the same period. In fact, various mid cap stocks turned out to be multi-baggers in the last one year.

But you must know that even though mid-cap stocks can aid in significant wealth creation over the long term, unlike large-cap stocks, they do not have the potential to generate steady returns across market cycles. Mid-cap stocks typically go through cycles of sharp upturns and downturns and are, therefore, riskier. And after a sharp rise in midcap stocks in the last one year, the room for any further upside in the near term may be limited.

If you are looking to discover the hidden potential of mid-cap stocks, you must adopt a cautious approach. Invest only in a well-managed mid-cap fund that focuses on quality and opt for the SIP route of investment.

Kotak Emerging Equity Fund (KEEF) is a mid cap fund that has evolved strongly in the last few years to figure among the top performers in the category.

Graph 1: Growth of Rs 10,000 if invested in Kotak Emerging Equity Fund 5 years ago

Data as on May 18, 2021
(Source: ACE MF)  

KEEF is a midcap biased fund that seeks to identify the hidden growth potential of mid-sized companies. Accordingly, the fund holds a mid-cap biased portfolio, while it also holds significant exposure to small caps along with balanced allocation towards large caps. Launched in March 2007, KEEF has been through multiple market phases and cycles and has done well to ride the market highs and lows during most of these phases. KEEF stood strong in the 2018-19 mid-cap crash even as many of its peers struggled to keep pace with market returns, thus turning out to be one of the top performers in the category. By generating a compounded annualised return (CAGR) of around 18.6% over the past 5 years, KEEF has outpaced its benchmark Nifty Midcap 100 – TRI index by a CAGR of over 3.5 percentage points. An investment of Rs 10,000 in KEEF 5 years back would have grown to Rs 23,503. The fund manager has proven his ability to timely identify and capture available opportunities in the mid-cap space and create significant wealth for long term investors.

Table: Kotak Emerging Equity Fund’s performance vis-a-vis category peers

Scheme Name	Corpus (Cr.)	1 Year	2 Year	3 Year	5 Year	7 Year	Std Dev	Sharpe
Quant Mid Cap Fund	42	104.27	40.22	22.12	17.57	16.69	23.94	0.176
PGIM India Midcap Opp Fund	1,325	120.56	43.17	21.98	20.04	18.94	25.33	0.175
Axis Midcap Fund	10,899	69.45	29.12	19.37	19.83	20.54	18.88	0.187
Tata Mid Cap Growth Fund	1,152	84.84	25.82	16.16	16.97	19.98	23.59	0.128
Invesco India Midcap Fund	1,425	78.05	26.51	16.14	18.08	20.23	22.21	0.132
Kotak Emerging Equity Fund	11,430	97.58	28.92	15.90	18.63	22.96	24.60	0.130
BNP Paribas Mid Cap Fund	873	87.76	28.26	15.24	15.99	19.15	22.79	0.123
Nippon India Growth Fund	9,123	91.24	23.90	14.87	16.89	16.97	24.33	0.114
Edelweiss Mid Cap Fund	1,246	96.62	30.90	14.68	18.63	21.06	24.76	0.103
DSP Midcap Fund	11,249	71.32	25.06	13.64	17.67	20.11	21.74	0.102
Nifty Midcap 100 – TRI		105.22	23.54	11.23	15.04	16.23	27.44	0.070

Returns are point to point and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on May 18, 2021
(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.

KEEF holds a superior track record of generating market-beating returns across most time periods. Although KEEF has trailed its benchmark Nifty Midcap 100 – TRI in the last one year, it has outpaced many of its peers to find place among top category performers. Over the 2-year and 3-year time frame, KEEF has generated a noticeable lead of around 4.5 to 5 percentage points in CAGR over the benchmark and 2 to 3 percentage points over the category average. Whereas, over the longer 5-year and 7-year period, KEEF ranks among the top quartile performers in the category, much ahead of the benchmark.

On risk-reward parameters, though the volatility registered by the fund is slightly higher than the category average, it is much lower than the benchmark index. Its Sharpe Ratio (0.13) signifying risk-adjusted returns is much higher when compared to the category average as well as the benchmark.

Investment strategy of Kotak Emerging Equity Fund

Classified under the Mid Cap Funds category, KEEF is mandated to invest a minimum 65% of its assets in mid caps. Accordingly the fund holds a predominant mid-cap-biased portfolio. It holds significant exposure across large cap and small-cap stocks as well. KEEF makes well use of diversification and invests in as many as 65 stocks spread across sectors in its portfolio.

KEEF aims to identify the hidden potential of mid-sized companies by utilising the bottom-up stock selection approach. It seeks to invest in companies that are either at their nascent or developing stage and are under-researched but have the potential to deliver higher growth in the long term. The scheme aims to invest across sectors and follows a buy-and-hold strategy to derive the full potential of the stocks. Notably, the fund has a very low portfolio churning rate of 15-20% in the last one year.

Kotak as an AMC endeavours to invest in stocks, which, in the opinion of the fund manager, are priced at a material discount to their intrinsic value. The process of discovering the intrinsic value is through in-house research supplemented by research available from other sources. The potential of stocks is guided by considerations such as by the financial parameters of the company, reputation of the management and track record, companies that are less prone to recessions or cycles, companies which pursue a strategy to build strong brands for their products or services, market liquidity of the stock, and so on.

Graph 2: Top portfolio holdings in Kotak Emerging Equity Fund

Holding in (%) as on April 30, 2021
(Source: ACE MF)  

KEEF usually holds a fairly large portfolio of around 65 stocks. As on April 30, 2021, the fund held as many as 67 stocks in its portfolio, with the top 10 stocks together constituting around 33.4% of its assets. Supreme Industries is currently its top holding having an allocation of 5.7%, followed by The Ramco Cements, Coromandel International, Thermax, Schaeffler India, Persistent Systems, PI Industries, among others. Many of these stocks have been part of its portfolio for over two years now.

Names like APL Apollo Tubes, Supreme Industries, Jindal Steel & Power, Persistent Systems, Lauras Labs, Thermax, Kajaria ceramics, The Ramco Cements, Tata Consumer Products, PI Industries, Cadila Healthcare, Apollo Hospitals Enterprise, among others contributed immensely to the fund’s performance in the last one year.

In terms of sectors, Engineering tops the list of allocation with an allocation of 19.2%, followed by Financials at 13.2%. Auto Ancillaries, Cement, Fertilisers, and Consumer Durables are among the other core sectors in the fund’s portfolio. The top 10 sectors collectively account for nearly 76.3% of its assets. Though KEEF’s portfolio is inclined more towards Cyclical and Sensitive sectors, it is fairly diversified in Defensive sectors as well.

Suitability

KEEF has done exceptionally well in the past few years. It stood strong during difficult market conditions and has participated well during upside market movement. KEEF carries an impressive track record under the supervision of Mr Pankaj Tibrewal, who is known for his expertise in the mid and small-cap space.

Belonging to a process-driven fund house, KEEF focuses on identifying quality stocks in the mid cap space and holding it with a long term view. Though the fund’s volatility is slightly on the higher side, it has delivered in terms of risk-adjusted returns. The scheme also holds significant exposure to stocks in the large-cap and small-cap domain that can aid in diversification.

KEEF’s portfolio is inclined more towards Cyclical and Sensitive sectors. However, it is fairly diversified in Defensive sectors as well. This could help the fund provide some cushion on the downside and perform well across complete market cycles.

KEEF is suitable for investors with high risk appetite who can bear the higher volatility associated with the mid-cap space and invest with a long term horizon of at least 5-7 years.

This article first appeared on PersonalFN here