SHOULD YOU STEER CLEAR MID CAPS

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Three fund managers share their views and state where they are looking for value.

 The 1-year return of  Small/Mid-Cap category is 36%, way ahead of the Large-Cap (15.72%) and Flexi-Cap (23.12%) categories. In fact, the top performing fund (SBI Small & Midcap) has a superb 1-year return of 59.75% and even the category’s worst performer (Sahara Star Value) has a positive return of 6.76%.

While the valuation gap between large and mid caps is fast disappearing, Amit Rathi, Managing Director of Anand Rathi Financial Services, toldCNBC-TV18, that its important investors look at earnings growth. Referring to around 100 companies, he stated that the average earnings growth is in the range of 20%, ahead of what is being seen in large-cap companies. “People are paying for growth and for better balance sheets. If you look at historical valuations, one could argue that mid-cap valuations are high. However, the growth metrics at this point of time really support the mid- and small-cap story,” says Rathi.

We took the view of three fund managers.

  • Mid-cap stocks as a whole have had a fairly long period of over performance and are once again running ahead of large caps. How do you see them panning out?

Sunil Singhania, CIO – Equity, Reliance Mutual Fund: Select mid-caps have reported very good numbers. Also expectations are for some of the smaller companies to grow faster. Thus there is higher interest here. However, we also need to be careful and ensure that investments are made on fundamentally strong companies rather than only on hearsay, tips and only hope.

Mrinal Singh, Senior Fund Manager, ICICI Prudential Mutual Fund: Historically we have seen that mid caps being at a premium to large caps do not sustain for too long; as, either the latter surge to correct the disparity or the former falls.

Currently, there may be a few opportunities in the mid-cap space, but if you are looking for undervalued stocks, there are good opportunities in the large-cap space also.

One point worth mentioning is that while the market is up significantly from the levels where uptick in equities started back in October 2013, we are still distant from the overvalued or bubble territory. Sure, equity valuations are above average, but only marginally above the mean.

Anil Sarin, CIO – Equity, Global Asset Management, Edelweiss Financial Services: Your observations are accurate in the aggregate, but our investing style is bottom up. Using that style we are continuing to find interesting ideas even at current index levels. Having said that, if there is a broad based decline in indexes, then even our picks would get impacted. In such a situation, we invest gradually over a period of time. But we do not stop investing altogether based on perceived over-valuation of indexes.

  • Where are you looking for value in the mid-cap space?

Singhania: We clearly are looking at companies that can benefit and grow faster over the next 2-3 years. Space where both operating and financial leverage can play up, are being looked at by us closely.

Singh: Domestically oriented businesses, ones which could benefit from economic recovery are expected to do well in the long-term.

Sarin: We use our proprietary hexagon approach to find interesting stocks. These ideas can crop up anywhere, and we do not pre-decide the sectors.

  • Do you suggest investors steer clear of mid caps right now?

Singhania: As mentioned earlier, clearly tips, hearsays and only hope can lead to investors getting lured in buying non-fundamental stocks. Thus proper research and due diligence is advocated.

Singh: Investors may reap the benefit of better price bargains in quality large-cap stocks, by investing in multi-cap funds that have a large cap tilt of around 70% for wealth creation in the long term.

Sarin: Not really. Investors can instead decide to phase-in their investments to take advantage of time diversification.

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