Date:26/03/2006 URL: http://www.thehindubusinessline.com/bline/iw/2006/03/26/stories/2006032600431000.htm

Back Kotak Midcap: Hold

Aarati Krishnan

The stock selection has been offbeat, reflecting an effort to pick companies that are not the obvious frontrunners in a sector.

Launched just a year ago, Kotak Midcap Fund shows promise as an emerging investment option in the mid-cap fund space.

With a return of 88 per cent since launch, the fund has outpaced the majority of its peers investing in mid-cap stocks and has fared better than the average diversified equity fund.

This performance is impressive because market conditions over the past year have favoured large-cap rather than mid-cap stocks. Large-cap stocks have run way ahead of mid-cap stocks over the past year and now trade at a significant valuation premium to the latter. Given that mid-cap stocks have the potential to catch up, investors can stay with the Kotak Midcap fund.

More mid-size companies

An analysis of Kotak Midcap's portfolio since launch suggests that the fund focuses more on mid-sized companies than on those that fit into a mid-market capitalisation range. In February 2006, the portfolio spanned the entire market-cap range, from Rs 200 crore to Rs 6,200 crore.

Only about half the portfolio was invested in stocks with a market-cap of less than Rs 2,000 crore in February 2006. Large-cap picks such as Pantaloon Retail, BEML and IDBI were also among the portfolio choices. The portfolio clearly suggests a bottom-up approach to stock selection. Sector exposures are splintered across a wide range of businesses, with PSU banks, sugar and electric equipment being the top three choices in February.

These accounted for a modest 20 per cent of the assets. The stock selection has been offbeat and suggests a conscious effort to pick companies that are not the obvious frontrunners in a sector. To illustrate, in consumer non-durables, Britannia and EID Parry figure in the portfolio rather than a Marico or a Godrej Consumer.

Beats benchmark

In terms of returns since launch, the fund, with 88 per cent, has outdone its benchmark — the Junior Nifty (37 per cent), as well as the mid-cap indices such as the CNX Midcap index (57 per cent). The performance also compares well with mid-cap products such as the Franklin India Prima Fund and Birla Midcap Fund. That these returns have come at a time when mid-cap stocks have trailed large-caps is also a point in its favour.

Midcap stocks as a class appear to be now trading at a significant discount to the large-cap universe, after the secular run-up of the past year.

At about 25 times by end-February, the P/E is at a substantial discount to Kotak's large-cap funds such as the K-30.

Fresh investments can wait until the fund builds up a track record across a market cycle. But the performance so far provides enough comfort to hold on to the investment.