Small- and mid-cap funds score big

Large companies are supposed to perform better than mid- and small- sized companies during difficult times. However, the opposite has been true in the last two to three years. Small- and mid-cap equity funds are racking up significant gains over their large cap peers.

A quick look at the category returns reveals that large cap funds have dropped by an average 3.37 per cent in the one-year period. During the same period, mid-cap funds gained 2.31 per cent and small-cap funds gained 4.33 per cent. Over the three-year period, large cap funds have given an average return of 11.56 per cent, while mid-cap funds have delivered an astonishing 25.55 per cent. Small-cap funds as a category have posted average 31.40 per cent returns. These gains hold true even for longer periods such as five years: Large-cap funds have delivered 7.83 per cent, mid-cap funds have given 16.41 per cent and small-cap funds are on top with 18.22 per cent.

Why the difference?
According to some analysts, mid- and small-cap funds are benefiting to a large extent on account of cherry picking of beaten-down stocks. Beaten-down sectors like banking, real estate, capital goods and auto have outperformed since budget during the market recovery.

Jimeet Modi, CEO, SAMCO Securities, says the reason why small and mid caps have outperformed in last one to two years is that they have been able to deliver higher growth in sales and PAT numbers. "Because of smaller base, the growth in PAT and EPS gets magnified. However, out of the small and mid cap universe, only 20% have been able to deliver that kind of growth, the rest are still lagging the markets. Another set of stocks that have given phenomenal returns are the turnaround category of stocks. They too have given returns in double and triple digits in the past one year."

Modi said stocks like Dish TV, Sugar stocks, Allsec Tech, GM Breweries, Cosmo films, EMMBI industries, Sakuma Exports, APL Apollo Tubes have all delivered more than 100% QoQ PAT growth or companies have had a turnaround quarter. "Stock market rewards these companies handsomely when such kind of growth happens. This kind of growth is obviously not visible in the large cap stocks and they deliver muted returns, although the risk may be far lesser," he added.

Brokerage Bonanza Portfolio feels the outperformance of small- and mid-caps stocks is an indicator of risk appetite returning to the markets. "Rather than an indicator of economic revival, the out-performance of mid-caps and small-caps over their larger peers can be seen as the return of risk appetite in the markets, mainly amongst retail investors. Having said that the rise in mid-cap and small-caps aren't solely driven by sentiments and have fundamentals too in certain cases. For instance, institutional investments in certain pharma stocks have risen considerably after the increase in the weight for the industry in MSCI's indices. Further, the mutual fund industry has also witnessed huge flows in the last 12 months, a good proportion of which should have found their way towards the mid and smallcap segments."

Against the benchmark
However, picking the right mid and small-cap funds is important because not all of them beat their own benchmarks. In the mid cap fund space, 16 out of the 39 funds lagged their respective benchmark indices in 1-year period. Biggest outperformers include Escorts Leading Sectors Fund, Escorts Growth Fund and Birla Sun Life Pure Value Fund while the worst under performers include IDFC Sterling Equity Fund, ICICI Prudential Midcap Fund and Religare Invesco Mid N Small Cap Fund.

In the three-year time frame, the record was much better with one out of 33 mid cap funds under-performing their respective benchmarks. The biggest out-performers include Birla Sun Life Pure Value Fund, Escorts Leading Sectors Fund and L&T India Value Fund.

In the small cap fund space, nine out of the 20 midcap funds in the one-year period failed to beat respective benchmark returns. The biggest outperformers include Escorts High Yield Equity Fund, SBI Small & Midcap Fund and Sahara Star Value Fund while the worst among laggards include Axis Midcap Fund, DHFL Pramerica Midcap Opportunities Fund and Tata Midcap Growth Fund. In the thee-year period, none of the 18 small cap funds failed to beat their benchmarks with the biggest out performance seen in the likes of DSP BlackRock Micro Cap Fund, Reliance Small Cap Fund and SBI Small & Midcap Fund.