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Sunday, May 3, 2009

Era of Large-cap Stocks Returns

Fund managers are turning to large-cap stocks with a vengeance to recoup the losses

THE market crash of 2008 has changed the rules of the 'market' game. While it forced many retail investors to rethink about equity as a viable investment avenue, mutual funds weren't untouched either. Most of the funds are now busy replacing small- and mid-cap stocks with large-cap ones. It seems mutual fund managers are now seeking value and quality over growth in their equity portfolios. This is in sharp contrast to the days of the bull-run when mid- and small-cap stocks were undisputed star performers.
    A glimpse of the slaughter that shook the entire mid-cap and small-cap space is clearly evident from the performance of their representative indices. The BSE 500, BSE Mid-cap and BSE Smallcap indices have been crushed by about 43%, 54% and 59%, respectively in last one year. The Nifty and the Sensex, on the other hand, were down about 36% and 38%, respectively, during the same period.
    Large-caps had not enjoyed extraordinary gains in the bull-run. Their fall thereafter has thus not been that devastating either. Large-caps have got back their lost aroma and are the preferred flavour of the season.
    Schemes like Franklin India Opportunities, Principal Growth and IDFC Classic Equity, to name a few, have reshuffled their portfolios towards large-cap stocks by more than 20% in last one year (See Table). Correspondingly, their exposure
to mid-caps declined by nearly 15% - 27% during the same period. Most of these schemes have benchmarked their portfolios to BSE 200 allowing them far greater investment flexibility vis-à-vis their current preferences.
    Large-cap stocks, however, are not the favourites with the existing schemes alone. Many of the new fund offers (NFOs) seem to be banking upon them too. BSE 100, the Sensex and the Nifty appear to be the favourite benchmarks for the new schemes that have been already launched or are awaiting launch subject to an approval by the Securities and Exchange Board of India (Sebi). Canara Robeco's FORCE benchmarked against BSE 100 and Reliance asset managements' index funds that are benchmarked to Sensex and the Nifty, re
spectively, are yet to hit the market.
    Among those launched recently, ICICI Prudential's Target Returns Fund is pegged against BSE 100. According to Nilesh Shah, CIO, ICICI Prudential, 'the fund's investment has been restricted to top 100 stocks to facilitate liquidity which is most desirable given the schemes' structure'. Though IDFC has pegged BSE 500 as the benchmark for its GDP growth fund, its bias towards large-caps is clearly evident from its current's portfolio composition. Of the Rs 32 crore odd assets under management, only 37% have been invested into equities currently and nearly 85% of these equity investments were in large-cap as on March 31 '09.
    The market crash has definitely brought back
memories of the age old fable, that of the rabbit and the tortoise. The rabbit's vigour, speed and relentless stamina, similar to the one portrayed by most of the mid-cap stocks, may have bought him much closer to the chequered flag. But ultimately it is the slow but steady tortoise that ends up winning the coveted race.
    Similarly, while midcaps had made the investors accustomed to their stupendous rise in the blooming golden days of the equity markets, eventually it has been the large-caps to have established themselves to be more stable and dependable over a long run period, aptly proving that the slow and the steady ultimately wins the race.
    bakul.chugan@timesgroup.com 






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