Weekly Musings – NFO Pick (Whiteoak Capital Large & Mid Cap Fund)

27 Nov 2023 , 08:56 AM

LARGE & MID CAP FUND – HOW THEY FIT IN

A large and mid-cap fund is a form of multi-cap fund. The difference is that the multi-cap fund includes allocations for large caps, mid-caps, and small caps. On the other hand, the large & mid cap funds only focus on the large caps and mid cap stocks and the small cap stocks are, at best, a peripheral addition to the portfolio. One of the basic things to remember is that the share of mid cap stocks in India has been gradually increasing. Consider these numbers. Between year 2000 and 2004, the mid-caps accounted for around 19.2% of the overall market. That share has gone up to 31.2% in the post 2020 period. 

Clearly, this is an outcome of three things. Firstly, the mid cap stocks have captured much of the alpha and that has kept the retail and institutional interest robust in these stocks. Secondly, if you look at some of the large cap stocks like Eicher Motors or Havells today, they were all mid cap stocks about a decade back. It is this growth potential that makes them attractive. Above all, the formalization of sectors like retail, construction and logistics offers massive space for niche stories to dominate the mid cap space and also create outperformers. 

LARGE & MID CAP STOCKS – UNDERSTANDING THE PORTFOLIO MIX

Let us first understand  how these stocks are classified. All mutual funds adhere to the standard definition given by SEBI. Based on market cap rankings, the top 100 stocks are classified as large cap stocks. The stocks ranked 101 to 250 are ranked as mid-cap stocks and any stock ranked 251 and beyond becomes a small cap stocks. For the large & mid cap fund, the total universe will predominantly be the 250 stocks mentioned above. If you look at the cut-off in terms of market cap, then large caps are the ones with market cap of over Rs50,000 crore and mid-caps are the stocks with market between Rs17,500 crore and Rs50,000 crore. So, how will their portfolios look like?

Obviously, being an equity fund; the large & mid cap fund will have 70% to 100% allocated to stocks in the large cap and mid cap space. In reality, the equity exposure of these large & mid cap funds is well above 90% to ensure optimal returns over the long run. Within the equity mix, the large caps can range from between 35% to 65% while the mid-caps can also range between 35% to 65%. Historically, in India, mid cap stocks have done much better in rising markets while large cap stocks have done better in falling markets. Hence, the combination of these two categories ensures the safety and stability of large caps as well as the fleet-footedness and alpha potential of the mid-caps. By excluding the small caps, these portfolios tend to avoid the risk of illiquidity in their portfolios.

HOW LARGE CAPS AND MID-CAPS COMPARE AS INVESTMENT STORIES?

Here is a quick comparison of large caps and mid-caps in terms of their key characteristics and investment potential. Let us focus on the large cap stocks first. Large caps have easy access to capital and also easy access to talent. This enhances their ability to scale their operations rapidly. Generally, most large caps tend to have strong balance sheets that can survive the downturns in the market. In addition, the large caps can boast of certain pedigree in management, second line of defence and a track record of corporate governance. Most of them are industry leaders and enjoy stable businesses. Liquidity of the stock is also high. On the downside, large caps tend to get fully priced in the market, they are over-tracked by analysts and their growth and flexibility gets limited by size. Over time, they tend to become more of cash cows and less of growth businesses.

How do mid cap stocks shape up in comparison. Mid cap stocks offer the bigger alpha potential due to their focused business models and their ability to move fast. They have limitations on their scale, but that also means that they are frugal on capital usage. Their equity and debt levels tend to be very low. Mid cap story is about the formalization of the Indian economy post GST and that is likely to benefit mid-caps the most as more unorganized companies come into the mainstream. While large caps have dominated oil & gas, power, telecom, and metals; the mid cap space has unique sectors like healthcare, construction, logistics, defence etc. There are several sectors like IT, pharma, financial services, and capital goods where large and mid-caps co-exist to a large extent.

THE CASE FOR LARGE & MID CAP FUND IN INDIA

There are several justification for investors to adopt a large & mid cap approach to investing and a fund like the Whiteoak Capital Large & Mid Cap Fund.

1. The large & mid cap fund category is perfect for adopting a high active share approach. The fund house wants to keep active share at above 50% so this gives two advantages. It offers a wide universe to choose from and second avoids the risks of loading up on small caps, where liquidity may be an issue.

    

2. If you look at the BSE 500 index, which is a good proxy for the large & mid cap space in India, you find a good mix of stocks. The market cap of the index is 75% for large caps and 25% for mid-caps. It is two thirds into rate sensitives and one-third into others. It is 25% into export business and 75% into domestic businesses. It is 36% into defensives and 64% into cyclicals. That is the kind of mix that can automatically de-risk portfolios.

    

3. It is hard to pin point a theme that has done well in the last 15 years. In some years, alpha themes have done the best while in some years the value theme has done best. There are also cases like 2008 where low volatility did the best. In 2019, it was the Nifty that did the best. A fund that combines stocks is the best way to counter this. 

    

4. The above story is true for sectors also. If you look at the last 12 years, then real estimate was the star in 3 years, PSU Banks, metals, IT services and Pharma for 2 years each and private banks in one year. These are random and there is not trend. Again, a large & mid cap combination can sail best through such waters.

    

5. The moral of the story is that no particular style or sector dominates. The story is about sectoral rotation. The answer is an actively managed fund that keeps as close to the momentum as possible. That is where a well-rounded large & mid-cap fund comes in handy for investors.

HIGHLIGHTS OF THE WHITEOAK CAPITAL LARGE & MID CAP FUND NFO

Here are some key takeaways that investors should know about the NFO.

• The Whiteoak Capital Large & Mid Cap Fund NFO opens for subscription on December 01, 2023 and closes on December 15, 2023. Ramesh Mantri, Trupti Agarwal, Piyush Baranwal and Shariq Merchant will be the fund managers. 

   

• It is an open ended mutual fund scheme which is classified as an equity mutual fund scheme under SEBI classification norms. Any equity fund runs the risks of market volatility, business cycles, portfolio quality and active management risk, which could be subject to the perception of the fund manager.

   

• The performance of Whiteoak Capital Large & Mid Cap Fund will be benchmarked to the S&P BSE 250 Large Midcap TRI index. The TRI index is total returns index, which not only factors the capital gains but also the dividends received by the components of the index.

   

• The objective of Whiteoak Capital Large & Mid Cap Fund is to generate long term capital appreciation by holding and managing a diversified portfolio of stocks. While it will spread across large and mid-cap stocks, there can be no assurance of returns.
• Lumpsum purchases in the NFO entail a minimum investment of Rs500 per application and in multiples of Rs1 thereafter. However, once the fund opens for continuous purchase and redemption post the closure of the fund, the minimum application will be Rs500 per application. The SIP investment will also have a minimum base of Rs500.

   

• There will be no entry load on the fund. However, being a high-risk and long term equity large & mid cap fund, the Whiteoak Capital Large & Mid Cap Fund will impose an exit load of 1.00% if redeemed within 1 month of the allocation of such units. There will be no exit load after that. 

   

• The Whiteoak Capital Large & Mid Cap Fund offers Regular Plans and Direct Plans to investors with the TER adjusted accordingly. In addition, the fund also offers investors the growth option to its investors.

   

• While there are no lock-in restrictions, it is suggested that ideally the fund should be held for a minimum period of 5 years, or more, to derive the full benefits of varying equity cycles and the full benefits of risk reduction through diversification.

It must be noted that in the equity funds, the dividends are taxable at the marginal rate of tax while capital gains are taxed at concessional rates of 15% for short term capital gains and 10% for long term capital gains (above a threshold of Rs1 lakh of capital gains).

UNDERSTANDING THE LARGE & MID CAP FUND UNIVERSE IN INDIA

Here is a quick look at the other existing large & mid cap funds available in India at the current juncture. These fund have been ranked on 3-year returns.

Scheme  Name	NAV  (in Rs)	Return (%)  3 Years	Return (%)  3 Years	Return (%)  Since Launch	Daily AUM  (Rs in crore)
Quant Large and Mid-Cap Fund	94.96	20.35	29.14	18.82	1,249.77
HDFC Large and Mid-Cap Fund	261.00	25.55	28.80	13.30	13,092.27
ICICI Prudential Large & Mid Cap Fund	775.65	20.38	28.07	15.93	9,355.45
Motilal Oswal Large and Midcap Fund	23.43	29.64	27.06	23.03	2,623.53
Mahindra Manulife Large & Mid Cap Fund	22.62	21.87	26.58	23.26	1,523.02
UTI Large & Mid Cap Fund	133.65	23.66	25.94	14.13	2,129.68
Bandhan Core Equity Fund	105.50	25.09	25.00	15.03	3,112.43
SBI Large & Midcap Fund	492.77	15.30	24.74	16.99	16,786.66
Navi Large & Midcap Fund	33.17	14.92	23.28	16.24	265.58
Baroda BNP Paribas Large & Mid Cap Fund	20.67	18.01	22.84	25.27	880.67
Edelweiss Large & Mid Cap Fund	73.78	18.83	22.81	16.18	2,387.63
Kotak Equity Opportunities Fund	279.83	19.86	21.97	16.87	16,168.74
Nippon India Vision Fund	1,089.56	20.44	21.80	13.58	3,657.12
DSP Equity Opportunities Fund	484.17	20.60	21.73	16.41	9,382.87
Sundaram Large and Mid-Cap Fund	71.56	16.46	21.30	15.18	5,633.86
Mirae Asset Emerging Bluechip Fund	126.93	18.19	21.11	22.40	29,673.07
Tata Large & Mid Cap Fund	461.01	14.70	21.07	16.28	5,589.07
Union Large & Midcap Fund	20.87	18.24	21.04	20.36	574.05
Invesco India Growth Opportunities Fund	75.24	21.51	20.69	16.81	4,324.23
Bank of India Large & Mid Cap Equity Fund	76.01	17.66	20.69	13.82	245.95
HSBC Large and Mid-Cap Fund	20.76	22.66	20.42	17.06	2,454.90
Franklin India Equity Advantage Fund	152.41	15.82	19.78	14.24	2,892.33
Canara Robeco Emerging Equities Fund	209.25	13.41	19.16	20.33	18,486.17
LIC MF Large & Mid Cap Fund	31.60	15.49	19.10	14.05	2,321.25
Aditya Birla Sun Life Equity Advantage Fund	776.52	15.64	15.82	15.27	5,230.57

Data Source: AMFI

The above table shows the performance of the 25 large & mid cap funds we have in India. These funds already manage a substantial AUM of Rs1,60,040 crore. Over a 1 year period, the average returns have been around 19.3%, while the average CAGR 3-year returns have been 22.8%. This makes them among the best performing fund categories in India. If you look at these funds from inception, the average returns are close to 17.3% CAGR. Clearly, large & mid cap funds are a story and the Whiteoak Capital Large & Mid Cap Fund is timed right to capitalize on a big growth vector.