Fund managers expect front line indices to yield modest returns due to steep valuations. Large-cap stocks within these indices had seen sharp rerating, as investors looked for pockets of safety.
Fund managers expect a reversal of fortunes in the broader markets
— mid- and small-cap stocks — where earnings visibility had waned.
“Mid- and small-cap earnings had got downgraded. However, as the economy recovers, earnings growth of mid- and small-cap companies should also pick up, as they have a higher linkage to the domestic economy,” said Mahesh Patil, chief investment officer, Aditya Birla Sun Life Mutual Fund (MF).
“The prevailing risk on sentiment globally should also lead to continuing foreign institutional flows — a part of which should go into mid- and small-caps,” added Patil.
Source: Value Research, data as on December 31, 2019
According to experts, funds will need to realign their portfolios to take advantage of a pick-up in the broader markets.
“If the market broad-bases gradually as and when economic recovery plays out, clearly funds will have to decide what kind of mid-caps they need to buy and at what pace. At our asset management company, we are taking a bottom-up approach to spot mid-caps with strong investment case,” said Rahul Singh, chief investment officer-equities, Tata MF.
The return scorecard in recent months shows that mid- and small-caps are showing early signs of outperformance. In three months, the BSE MidCap has yielded returns of 5 per cent in the last three months, while the BSE SmallCap has delivered returns of close to 9 per cent in the same period. Meanwhile, the 30-share Sensex has posted gains of 4 per cent.
On Wednesday, while the front line indices — Nifty and Sensex — ended marginally in the negative, the broader market indices ended firmly in the positive territory. The BSE MidCap and BSE SmallCap ended 0.6 per cent and 1 per cent higher, respectively, on Wednesday.
Experts say investors in a few multi-caps may even see wider underperformance, as these are virtually being run like large-cap funds.
“There are some multi-cap funds in the industry, where almost 100 per cent of investments are in large-cap stocks,” said a fund manager.