Three trends that powered mutual funds:: Business Line

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Mid-cap and banking funds, and funds with shorter track record have led from the front this year.

If you owned stocks, chances are you didn’t join the party that was on in the stock market this year: 19 of the 30 stocks listed on the BSE lagged the Sensex gains of 21 per cent so far this year (January 2 to November 5, 2012). But if you owned equity mutual funds, there was an eight out of ten chance of matching or even beating the Sensex.

Diversified equity funds on an average gained 26.5 per cent in 2012, beating the bellwether by 5.5 percentage points.

With the broader market represented by the BSE 500 clocking a 24. 8 per cent return, half of the 184 diversified funds bettered the broader index too. Here are three major trends in this year’s performance.

MID-CAP FUNDS WIN

After the negativity in 2011, market expectations of interest rate cuts and reform measures to boost economic growth fuelled a rally in mid-cap stocks this year. As a result, mid-cap funds emerge clear winners in 2012.

Six of the top ten performers in the diversified category are mid-cap funds. They include Principal Emerging Bluechip, SBI Magnum Emerging Businesses, BNP Paribas Mid Cap and Axis Midcap.

Funds that can rove across market cap to find the best choices, or multi-cap funds such as Reliance Equity Opportunities (recommended by Business Lineon December 25, 2011) also found a place in the top ten.

For most part of the year, mid-cap stocks constituted about half the portfolio of this fund. The top ten funds gained 38.5-43.5 per cent this year, way above the Sensex , BSE 500 and the BSE Mid-cap index returns of 29 per cent.

Had you decided to invest in mid-cap oriented funds in January this year, you didn’t have to be too choosy: 28 of the 38 mid-cap funds outperformed the BSE/CNX Mid-cap index while all mid-cap funds bettered the Sensex/Nifty returns. IDFC Premier Equity, an oft recommended mid-cap fund, appears among the laggards in the mid-cap category.

This may be because the fund was open for lump sum subscription only for three months between end February and May 2012. It was among the top-performing diversified funds in the 2010 rally. However, IDFC Sterling Equity, a mid-cap fund suggested by us in early 2012, and ICICI Pru Discovery, recommended often by us, are placed in the top 25.

For most of these winners, stocks from the banking, consumer non-durables and pharma sectors have been top choices during the year. HSBC Midcap and Axis Midcap have benefited from higher exposures to the auto ancillary space as well.

For example, Axis Midcap held around 4 per cent each in Apollo Tyres and Amara Raja Batteries till September 2012.

Even as there is a slowdown in new vehicle sales, tyre and battery businesses benefit from the demand for replacement in existing vehicles. Thanks to this, these two stocks gained 60 per cent and 113 per cent, respectively, during January-September 2012.

In fact, a tilt towards mid-cap funds is what makes this rally different from the one in 2010.

The upswing then saw a mix of dividend yield funds (Tata Dividend Yield and Birla Sun Life Dividend Yield Plus), large-cap oriented funds (HDFC Equity and Quantum Long-Term Equity), mid-cap and MNC funds topping the charts.

For the reason that this rally favoured mid-caps, oft recommended funds byBusiness Line such as Quantum Long-Term Equity, HDFC Equity, HDFC Top 200, BSL Frontline Equity and Canara Robeco Equity Diversified do not figure among the toppers. But their returns beat the broader markets.

BANKING IN, DIVIDEND YIELD OUT

Not only mid-cap funds which favoured banking stocks, but banking sector funds too emerge winners. Banking stocks rose this year on the back of a peaking out of the interest rate cycle, cuts in reserve ratio and reform measures initiated for reviving the economy.

Expectations of improved credit offtakes and a rise in asset quality fuelled the rally in these stocks. Within banks, it was private sector bank stocks such as Karnataka Bank, Yes Bank, J&K Bank and IndusInd Bank that led the race even as public sector banks lagged owing to recurring bad loan problems.

With the BSE Bankex/CNX Bank Index bagging 43.5 per cent returns, funds such as ICICI Pru Banking and Financial Services, Reliance Banking (suggested by us in September 2011 and April 2012), Religare Banking and UTI banking gained 44-55 per cent this year, beating the best performing diversified funds. While banking funds did equally well in 2010, they lost out badly in the 2011 fall.

FMCG was another sector that brought handsome profits this year. The two FMCG sector funds from ICICI Pru and SBI Magnum bettered the broader indices by over 10-20 percentage points in 2012. The latter has been a chart topper for three continuous years now.

With valuations of FMCG stocks stretched to a huge premium over the market, the time may be ripe to make a switch to diversified funds.

A winning theme of the 2010 rally, but a laggard this year, is ’dividend yield’ funds. Barring Principal Dividend Yield, none of the other six funds has beaten the BSE 500/CNX 500 returns. This is in contrast to 2010 when all dividend yield funds outdid the broader indices by 5-15 percentage points.

They did do a fine job of containing losses in their NAV in 2011.

Given that risk-taking has been the predominant theme in this rally, a defensive theme like dividend yield could have lagged the markets.

But again, investors in these funds should hold for the long-term given the downside protection that such a strategy offers

GOOD SHOW BY NEWER FUNDS

Out of the 22 equity funds that have a track record of between one and three years, eleven funds, or fifty per cent of them have bettered the Sensex returns.

Eight of these funds managed to beat the returns of the broader indices as well. This implies that newer funds have participated well in the current rally.

The outperformers (in the diversified category) among newcomers include Axis Midcap, Reliance Small Cap, Mirae Emerging Bluechip, Birla Sun Life India Reforms and Union KBC Equity. The first three find a place among the top 20 performers of 2012 too.

No such newcomers’ luck for infrastructure funds, though. Whether newer infra funds such as those from BOI AXA, Baroda Pioneer or IDFC (launched in 2010-11) or older ones such as ICICI Pru Infra or Tata Infra, they all appear among the laggards.

While some infrastructure stocks may be a good contrarian bet at these beaten down valuations, playing this theme through select stocks or diversified equity funds appears a better bet than thematic funds that play on infrastructure.