The Hindu Business Line : Equity funds pruning exposures to small, mid-cap stocks

On `mid' path
As on June 30, many equity funds had substantial exposure in mid-cap stocks
Funds such as Magnum Comma (16 per cent) and Reliance Equity (18 per cent) had significant exposure in small-cap stocks
With markets falling, many equity funds may consider pruning exposures in these stocks

Kolkata , July 21

Equity fund managers are ready to ease their exposure to small and mid-cap stocks, many of which have been battered ever since the market started to decline. While a sharp drop in valuations makes it difficult for them to exit, a clear tone-down on this front is beginning to take shape.

Latest trend

A look at the latest trend suggests that a number of equity funds are seeking to trim down their small and mid-cap holdings, an exercise that investment circles feel may prove to be quite costly for unit holders if it is conducted hurriedly.

The end-June allocation patterns reveals a distinct 20-45 per cent allocation to mid-cap stocks by many of the diversified equity funds, with small-cap counters bringing up the rear. The latter account anything between 7 and 12 per cent in many cases.

While market capitalisations are often defined in loose terms, MF sources indicate that fund managers are generally hoping to spruce up their portfolios in line with the current situation — which in certain cases may require a good reduction in stocks that are being seen as `unsafe'.

Mid-cap stocks

"Compared to their peaks, many stocks in the mid-cap segment have been ravaged," says an MF functionary, admitting that it may well be difficult to justify their existence in portfolios if the market drops further - especially when investors start getting more concerned with issues such as stability and protection.

Figures collated by Plexus Management, a distributor, demonstrate that mid-caps (as on June 30) accounted for a sizeable portion in quite a few cases. Canemerging Equities, for instance, had 30 per cent in such stocks, while DBS Chola Global Advantage had 38 per cent.

HSBC India Opportunities (23 per cent), ING Vysya Domestic Opportunities (29 per cent), JM Emerging Leaders (24 per cent) are some of the other examples. On the higher side, there were funds such as Tata Service Industries (62 per cent) and UTI Dynamic Equity (59 per cent).

Some sections defend the fund managers' stance by referring to the potential of these stocks. "There is no reason to doubt their potential. Good mid-caps of today can very well turn into tomorrow's large-caps," a fund executive said.

Niche stocks

Some funds will have to perform Herculean tasks if these ever have to root out small-cap stocks altogether. As the Plexus assessment shows, these counters do occupy a niche of their own in cases such as ABN Amro Future Leaders (7 per cent), DBS Chola Opportunities (9 per cent), Kotak MNC (9 per cent), SBI Magnum Comma (16 per cent) and Reliance Equity (18 per cent).

Needless to add, two funds, both of which track small-caps actively, have a fair bit of exposure to this segment. Franklin Templeton Smaller Companies and Sundaram SMILE have invested over 9 per cent and 19 per cent respectively in these scrips.

Also, Prudential ICICI Emerging STAR has 29 per cent in small-caps. Among the thematic funds, Reliance Media & Entertainment has a 38 per cent allocation.