Outlook of midcap MFs not bright: Dhirendra Kumar

Excerpts from Midcap Radar on CNBC-TV18 Watch the full show » Nifty BSE | NSE 10/02/12 Are Mutual Funds betting on Nifty?

Dhirendra Kumar, CEO, Value Researchonline, said the outlook for the midcap segment may not be very bright. From the midcap fund space, he likes Sundaram Midcap for its sustained performance and Franklin Prima.

Here is a verbatim transcript of the exclusive interview with Dhirendra Kumar on CNBC-TV18. Also watch the accompanying video.

Q: Basically, is it a good idea for investors to invest rather through midcap funds than make their picks themselves?
 
A: It is a good idea to be buying midcap fund than trying to picture midcap stocks yourself, unless you are especially very knowledgeable about building a portfolio because midcap comes with their own set of risk and the downside risk with midcap with less understanding.
 
Q: I am asking you this question just to check whether the performance of the midcap funds that you have picked Magnum Emerging, ICICI Prudential, Emerging Star and Sundaram Midcap have these funds outperformed the midcap index in the past six months or so?
 
A: The midcaps which you are referring to and the one's which we have listed here are not my picks, they are the popular midcaps and they were the most popular midcaps in 2007. And in 2008 what we have seen so far that the midcaps were unlikely to escape any substantial fall and certainly they are the worse affected. But of the four only Sundaram Midcap stands out and all others are very badly bruised and I don't see hope in the recent future. And let me tell you these are not the worst midcap. In fact for some of the worst midcaps the nightmare continues and the leftover portfolio in many other midcaps is so bad and is in such a state that the fund manager will be facing some extreme liquidity crisis, even if he get an insignificant redemption today.

Q: Just to mention the four midcaps that you are talking about is BNP Paribas Select Midcap, Prudential Emerging Star, Franklin India Prima and Magnum Emerging Businesses. Let's say I have to go and buy these companies, usually while we should look at the stocks they are holding, we buy them by name. I am trying to look at their portfolio, I can't find a trend is the fund manager buying cyclicals, is he trying to buy financials, is he trying to buy defensives or is he balancing it off with a couple of largecaps. How do I pick these because they seem to be all over the place auto ancillaries, banks there doesn't' seem to be any particular trend or thought process into the portfolio or that is what seems to be on first glance?

A: Yes, in fact midcaps are not supposed to have a thought process because the largecap fund shows some kind of trend and preference of a very distinct kind. When it comes to midcap and smallcap fund, I think these are very stock specific thematic portfolio and right now what we are witnessing is clear lack of trend and I think many of these portfolios may not be portfolio of choice, it is simply because these fund managers are facing redemptions and they are able to get out of things, which they can easily get out and these are simply the leftovers. So, I don't think these are portfolios by choice and many large positions maybe the fund managers might be a victim of illiquidity today.

Q: How do we pick these companies should we go with the fund manager? The problem with the fund manager in many of these midcaps these are sell side guys moving on to buy side- and in the last few months and years the mutual fund industry has grown so fast that some of these guys are pretty new. Should I go with the fact that the corpus is small or big, should I go with past performance? Can you give us three-four indicators and then pick two funds that you believe stand out on these parameters?

 A: Today size is not an issue while choosing a midcap fund one should generally avoid a very large asset base because a fund manager tend to loss his focus. But today going by what has happened in the market in the past one year, I don't think size is any concern today. Yes, go by the history and go by the experience of the fund manager because that I think is a crucial differentiator. And what we see is something like Sundaram Midcap, which is still looking impressive for its sustained performance and of course the outlook for the midcap segment as such, may not be very bright.

Q: Besides Sundaram Midcap anything else that you would pick?

 A: Besides Sundaram Midcap, I think the only other fund which deserves evaluation is Franklin Prima.

 

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