Portfolio Moves. Kotak Mid-cap misses the party

Indian equities have been on a roll since the beginning of this year, with the bellwether indices the Sensex and Nifty touching new highs. But the rally in the mid- and small-cap space has been far more exciting than that in their large-cap counterparts. Consider this the S&P BSE Mid Cap Index has gained almost 22.4 per cent since January this year, compared with a 17 per cent gain for BSE S&P Sensex. Midcap-oriented mutual fund schemes that bet big on these mid-sized companies have handed out tidy gains to their investors.

But not all of them have managed to deliver benchmark-beating performance. Kotak Mid-cap Fund is one of them.

Historically, though the fund has been able to contain downside during market declines, its out-performance during pull-back rallies has been modest.

Likewise, over the last six months the fund’s performance has been lacklustre and the fund clearly missed the party in the mid- and small-cap space. And this slack performance over the last six months has had a negative rub-off on its one-year performance too.

Within the mid-cap fund category (schemes that have the S&P BSE Mid Cap Index and Nifty Free Float Midcap 100 as the benchmark), the fund ranked in the last quartile on a one-year return basis. The weak show was primarily on three counts. One, the scheme’s sector shifts did not work well and stock choices have been a drag on the scheme’s performance.

Over the last six months, the fund reduced exposure to consumer durables from over 4 per cent in December 2016 to less than 2 per cent. However, stocks in this space have had a good run during this period, with the S&P BSE Consumer Durable Index gaining 54 per cent since the beginning of 2017. Likewise, the fund cut allocation to financials, at a time when stocks in that space actually managed a good show. Also, holding on to stocks in the beaten down pharma space cost the scheme dear.

Second, besides wrong sector shifts, the stock picks also did not work. For instance, sedate performance by stocks such as Strides Shasun (9 per cent decline), Torrent Pharmaceuticals (7 per cent decline), SRF Limited (10 per cent decline), Divis Laboratories (8 per cent decline),Pennar Engineered Building Systems (14 per cent) and Amara Raja Batteries (7 per cent) impacted performance. In fact, a third of the stocks in the scheme’s portfolio declined or barely managed single-digit return over the last six months.

Finally, a diffused portfolio of 59 stocks with the top holding (Techno Electric Engineering) at less than 3 per cent was also responsible for the weak performance.

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