Midcap fund has outperformed the benchmarks, says Sundaram Mutual Fund

Kumar said he will stick with a lot more diversified kind of a portfolio approach and many of company's portfolios are hinged on firms which have strong balance sheets, good promoters, strong business mode.

Clearly, the euphoric wave that swept up all the smallcaps and some of the smaller midcaps to all-time highs and significant overvaluations is giving way as you hit some of the weaker macros and some amount of liquidity drying from overseas. So clearly, in the last six months we have seen a clearer divergence, these largecap outperforming smallcaps by about more than 20-25% compared to bunch of stocks. Clearly, the valuation premium that the smallcaps enjoyed over the Nifty etc has shrunk and it is basically the BSE smallcap index on a one-year forward is now at a discount to the Nifty or Sensex.

Clearly to a large extent, I think this excessive valuations have drained out and if you look at the smallcaps and midcaps have good earnings trajectory. Going ahead, the micros and the corporate fundamentals have been improving. So from hereon, you would find that the financials and the earnings growth in these companies would be the ones to watch out for and which will be supportive of the returns that the smallcap segment would deliver. So, we remain quite constructive here at this point in time. I think a lot of money is made, when there is fear and clearly in the smallcap space now that is very true.

I wouldn’t think that there is going to be a leadership that is going to emerge in terms of some sectors at this point of time. Given the kind of growth that is more diversified across various sectors, given that the economy is doing well on all fronts, I would rather stick with a lot more diversified kind of a portfolio approach, though you will definitely find that consumption is definitely an overarching theme across various portfolios that we run, which will span across auto, auto components, lifestyle products, retail, apparels, brands and entertainment. So that is a pretty broad subject that we think we will play with and retail credit also fits into that overall optimistic area that we play in.

So, I think it's largely a diversified portfolio approach because even the infrastructure sectors have been coming back. In cement or if you look at the EPC (Engineering, Procurement, and Construction ) construction companies, they have been doing very well, the best order book you have seen with them, the book to build ratio is quite healthy. So overall, I think it is going to be more diversified approach.

You may say that probably the industrials and capital goods will probably come back into limelight over the next 12 months, because that is the sector which has not done well. But we believe that there are initial green shoots that are there in terms of orders coming into as the private sector starts to investing in for growth at this point in time.

I think information technology relatively has played out well, given the kind of support they had from strong free cash flows and valuations. I think that was probably the entry argument and then with improved growth outlook and weakening rupee, I think a lot of the traders played out. Henceforth, we would look at information technology as more a neutral to the market in the midcap space than being a big driver of alpha in the next 12 months. So we would be very selective there.

I think like we discussed last time around, whether be it midcaps or smallcaps or larger companies, clearly, during these kind of times when there is uncertainty from macros and from global liquidity that we are seeing, I think there would be a move towards being a lot more defensive and getting defensive across sectors. Probably, even in an industrial sector or infrastructure, I think companies with better balance sheets, better promoters and companies which have some kind of competitive edge in the markets, so I think that is where the markets are moving to, there is a premium for having low beta in this market conditions and volatility is increased in last six months. So I think that a trade and if you look at the portfolio that you mentioned in terms of names that you have talked about, many of our portfolios are hinged on portfolio companies which have strong balance sheets, good promoters, some kind of a strong business mode which keeps these companies fairly insulated during tough times and enable these companies to still outgrow the market and maintain profitability.

So, I think that is why if you do look at some of the funds like a midcap fund, the fund has outperformed the benchmarks by about more than 3% in the current calendar year, that is reflective of the quality of the portfolio and I think that is how next one year would shape up when there are pressures on different fronts that we see.