Invesco Mid Cap Fund’s (IMCF) performance after March 2020, when the Covid-19 pandemic began, has been uninspiring. Indeed, many equity schemes that had been outperformers until March 2020 have become underperformers since then. A Moneycontrol study shows that about 70% of the midcap schemes that were part of the top two quartiles in the category till March 2020 moved down to the third and fourth quartiles in the subsequent period, and remain there till date. However, IMCF’s long-term performance has been notable. Fund manager Pranav Gokhale has taken steps to broaden the portfolio and made corrective measures. This scheme is part of MC30, Moneycontrol’s curated basket of 30 investment-worthy mutual fund schemes.
2/10
As mandated by the regulator, IMCF invests at least 65 percent in midcap stocks and the rest in large and smallcap stocks. It follows a high-risk and high-return investment strategy suitable for investors with a big appetite for risk. Pranav Gokhale has been managing the scheme since March 2018.
3/10
Despite a mediocre short-term performance, IMCF has managed to deliver decent returns over the long run. For instance, its performance as measured by 10-year rolling returns calculated over the last 14 years shows that IMCF delivered compound annual growth of 18 percent while the S&P BSE 150 MidCap – TRI (Total Returns Index) gave 15.3 percent. Says fund manager Gokhale, “We look at midcaps that will translate into large caps tomorrow. We choose growth centric names that have a reasonable amount of return ratios and cash flows and with good-quality promoters.”
4/10
Though the scheme withstood the market correction relatively well in March 2020, it has failed to tide over the market volatility that followed later. “A particular style that was working until March 2020 went out of fashion. And, if we compare ourselves to the benchmark, there were a couple of stocks in the benchmark that did really well, but we avoided them as we were not really sure of their promoters’ quality,” explains Gokhale. “Our measured participation in the sub-segments within a sector, like banks, chemicals, commodities and utilities, did not work well,” he adds. For instance, within banks, PSU players have started to perform well of late, while the scheme had bet only on private players. Within the utilities space, the scheme had notable exposure to the gas sector, which did not do well. But other utilities have performed well in the past year.
The fund manager has been working to bring the scheme back on track. “We have diversified the portfolio by increasing the number of holdings and made it a growth centric portfolio,” says Gokhale. He has increased the number of stocks to 55 from 42 over the last year. This has resulted in a higher churn ratio than the category average. A relatively smaller corpus (Rs 2,525 crore) in the midcap category has enabled the fund manager to take active positions in the mid and smallcap segments.
6/10
Over the last six months, IMCF has added 21 stocks to its portfolio, including Bank Of Baroda, Abbott India, Vedant Fashions, The Indian Hotels Company and TVS Motor Company.
7/10
Mid-cap investing involves more bottom-up stock selection, and to that extent, being sector overweight/underweight is an outcome, says Gokhale. However, he likes sectors such as auto, auto ancillaries, retail, consumer discretionary, industrial construction and financials.
8/10
Apart from the required allocation to midcap stocks, IMCF has made a sizeable allocation to largecap stocks (an average of 12 percent over the last three years) and also to smallcaps (an average of 14 percent).
IMCF has managed downside volatility relatively well as its downside deviation is lower than the category average at any point of time. Downside deviation is different from standard deviation. A scheme’s standard deviation measures a scheme’s upside and downside volatility. But upside volatility doesn’t really hurt us; it’s when your fund goes down that it hurts us. So, the downside deviation studies to what extent the scheme’s return deviates below the average return. A scheme with lower downside deviation is preferred. Downside deviation is the main ingredient to calculate the Sortino ratio, which is one of the parameters used in MC30.
10/10
IMCF can be part of the core portfolio of investors with a big risk appetite, with a time horizon of five years or more.
