Mid-cap funds go big on financials, auto; Small-caps prefer services and capital goods

Mid-cap funds go big on financials, auto; Small-caps prefer services and capital goods

Financials continue to be the golden goose for the top performing mid-cap funds. The sector ranks first in terms of exposure for three of the top five funds (on a three-year basis). At the same time, mid-cap funds are also going heavy on the auto sector.

The PGIM India Midcap Opportunities Fund – Regular Plan, Quant Mid Cap Fund, and HDFC Mid-Cap Opportunities Fund, which have returned 39.2%, 37.8%, and 36.8% on a three-year basis, have a 17.3%, 27.3%, and 21.6% exposure to financials — the most among their respective portfolios.

The second-best mid-cap performer — SBI Magnum Midcap Fund — boasts of 39.4% returns in three years and has 10% exposure to financials. It’s preferred bet is auto (15.7% exposure), and capital goods (14.3%).

Interestingly, the most consistent performer on both a one-year and three-year basis — Motilal Oswal Midcap Fund – Regular Plan — does not have significant holding in financials, with 21.7% exposure to technology, its highest. Auto and services account for 14.9% and 11.6% exposure, respectively.

Auto also accounts for 15.7% exposure to SBI Magnum and 13.4% to PGIM’s fund, which means three of the top five mid-cap schemes have significant exposure to the sector.

“Chip shortages meant the post-Covid revival that everyone expected in the auto sector, was delayed. Now that the shortage is being dealt with, sales are close to their long-term averages. In addition, the outlook for new vehicle sales has excited the Street,” said Alok Singh, chief investment officer at Bank of India MF. Thanks to robust earnings and the highest re-ratings, MFs are bound to be overweight on financials, he added.

Capital goods, however, is the highlight as far as MFs’ portfolios are concerned.This has been a sector with significant exposure not only among the top mid-cap schemes, but also the best small-cap performers.

A look at the data shows that it is among the top three sectors to which four of the best small-cap performers have exposure.

The Nippon India Small Cap, HDFC Small Cap, ICICI Prudential Smallcap, and HSBC Small Cap have a 17.2%, 13.1%, 10.3%, and 16.8% exposure, respectively. Only the Quant Small Cap Fund doesn’t have this sector among its top three in terms of exposure.

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Experts say a higher capex by the government has led to better order books for capital goods majors.

“Companies in the sector not only have a better order book but also good earnings visibility, and higher capacity utilisation. There is cause for cheer, which reflects in the share prices of major players,” said a fund manager who did not wish to be named.

While the capital goods sector rules the roost among small-caps, there is significant presence of services too— among the top three sectors for three of the top five schemes.

The Quant Small Cap Fund, which tops the small-cap league with returns of 63.2% over three years, has 9.5% exposure to services — its third highest — while the sector is the most preferred by the HDFC Small Cap Fund – Regular Plan (22%) and ICICI Prudentil Smallcap Fund (19.3%).

Both Singh and the fund manager cited above said the revival in both business travel and tourism has led to higher occupancy among hotels, which has driven the services sector.

With most of the names in financials being large-caps, the ability of small-caps to invest in such firms remains limited, they added, adding that capital goods and services is where the small-cap funds see opportunities.