DSP Midcap Fund: Gaining from Quality Businesses with Good Growth Prospects

Jul 02, 2020

After more than two years of this corrective phase, the broader market seems to be on the cusp of a bull phase. Over the last three months, the mid-cap and small-cap indices have outperformed their large cap peer.

From a risk-return point of view, midcaps appear better placed compared to small caps. Though the outlook on earnings for midcaps continues to be bleak due to the lockdown, few companies across various sectors with strong balance sheet and efficient business model could benefit during this downturn and emerge stronger.

Therefore, it is important to remain focused on quality and not swayed by the recent rally.

DSP Midcap Fund (DMCF) is one such midcap fund that focuses on picking companies with consistent earnings and significant growth potential.

Graph 1: Growth of Rs 10,000 if invested in DSP Midcap Fund 5 years ago

Launched in October 2006, DMCF was earlier categorised as small & midcap fund. With significant allocation to smallcaps under its previous mandate, the fund faced performance pressure (CY 2015 to 2017) and struggled to beat the midcap index. However, change in the investment mandate to midcap fund at the beginning of 2018 proved to be a boon for its investors because the fund managed to curtail the smallcap component in the portfolio just before the midcap crash and reduce high risk element. DMCF figures among midcap funds that have shown superior outperformance in the recent midcap crash and has managed downside risk better than most of its peers. Over the last 5 years, DMCF has generated a compounded annualised return of 9%, compared to 3.4% CAGR delivered by its benchmark Nifty Midcap 100-TRI, thus outperforming the index by a CAGR of over 6 percentage points.

 
Graph 1
Data as on July 1, 2020
(Source: ACE MF)
 

Table: DSP Midcap Fund's performance vis-à-vis category peers

Scheme Name Corpus (Cr.) 1 Year (%) 2 Year (%) 3 Year (%) 5 Year (%) 7 Year (%) Std Dev Sharpe
Axis Midcap Fund 5,157 3.11 6.41 9.85 8.92 18.75 18.24 0.08
Invesco India Midcap Fund 756 -1.74 1.96 4.90 7.92 18.40 21.70 0.01
Quant Mid Cap Fund 10 1.51 -0.16 3.32 3.78 8.58 21.30 -0.01
DSP Midcap Fund 6,498 -1.15 1.88 2.75 9.00 18.82 21.03 -0.03
Taurus Discovery (Midcap) Fund 44 -1.54 -2.16 2.53 6.68 16.23 21.07 -0.02
Tata Mid Cap Growth Fund 709 -7.23 1.92 2.07 5.69 17.12 23.10 -0.02
PGIM India Midcap Opp Fund 146 3.15 -0.83 0.79 4.54 NA 23.34 -0.04
Edelweiss Mid Cap Fund 780 -8.15 -4.34 0.59 5.32 17.32 23.24 -0.04
Kotak Emerging Equity Fund 5,871 -8.06 -2.01 0.53 7.79 18.51 22.96 -0.04
Nippon India Growth Fund 5,592 -11.27 -2.38 -0.01 5.07 13.27 22.82 -0.04
Nifty Midcap 100 - TRI -15.44 -8.87 -4.91 3.43 11.41 26.10 -0.08
Returns are point to point and in %, calculated using Direct Plan - Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on July 01, 2020
(Source: ACE MF)
*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fundinvestments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for futurereturns. The percentage returns shown are only for indicative purposes.
 

DMCF's performance over the recent years sets it apart from most other schemes in the midcap funds category. In the last couple of years, the fund has managed to outperform its benchmark by a significant margin and has been much ahead of the category average. Even over long-time periods of 5-7 years, DMCF has delivered superior returns over the benchmark and many category peers. Some of the other top performers in the category are Axis Midcap Fund and Invesco Midcap Fund.

DMCF has achieved superior returns at reasonable level of risk. Its volatility is lower when compared to the benchmark and category average, while its risk-adjusted returns are far superior.

Investment strategy of DSP Midcap Fund

DMCF invests predominantly in equity and equity related instruments of midcap companies. The fund adopts the bottom-up approach to seek both growth and value stocks. Value is discerned when the fund manager believes that the long term growth potential of a company is not fully reflected in the market price of the company's securities. While picking stocks for the portfolio, the fund gives consideration to low price-to- earnings, price-to-book, and price-to-sales ratios, as well as growth, improving margins, asset turns, and cash flows, amongst others.

It seeks to benefit from growth in stocks which could be due to a new product, a new process, growing market share, stronger brand equity, technological breakthrough, and unique position in a market, among other factors. The fund endeavours to pick stocks which could become potential leaders in their respective fields in the future.

Graph 2: Top portfolio holdings in DSP Midcap Fund

Graph 2 Graph 2
Holding in (%) as on May 31, 2020
(Source: ACE MF)

DMCF usually holds a well-diversified portfolio spread across stocks and sectors. As on May 31, 2020, DMCF held as many as 47 stocks, with some popular midcap names like Ipca Labs., Balkrishna Industries, Coromandel International, Bata India, and Atul Ltd. It also holds some large cap names like Divi's Labs and Infosys among its top holdings. Some of these stocks have been in the portfolio for well over two years now.

In the last one year, stocks like Ipca Labs, Divi's Labs, Coromadel International, Alembic Pharma, SRF, Dr Reddy's Lab, and Jubilant FoodWorks contributed the most to the fund's gains; while stocks like City Union Bank, Cummins India, The Ramco Cement, Finolex Cables, Emami, etc. eroded some of its gains.

DMCF's portfolio is fairly diversified across cyclical, defensive, and sensitive sectors. Banking and Finance stocks dominate the portfolio with a combined allocation of around 16%. Pharmaceuticals, Engineering, Auto Ancillaries, Consumption, Consumer Durables and Fertilisers, and Chemicals stand among the other core sectors in the fund's portfolio.

Suitability

DMCF is a process-driven fund and has been agile enough to take advantage of various investment opportunities present in the midcap segment. It aims to invest in a well-diversified portfolio of growth-oriented stocks but at the right valuations.The strategy has enabled it to perform consistently across market cycles, while keeping the risk low. DMCF is managed by Mr Vinit Sambre who is a veteran in the midcap and smallcap spaces and has been at the helm of the scheme for about eight years now. However, being midcap oriented, the fund may be prone to higher volatility. This makes DMCF suitable for aggressive investors with investment horizon of at least five years.
 

Warm Regards,
Divya Grover
Research Analyst
 

Editor's note: The last few years have not been among the best for equity mutual funds. While most funds have underperformed or are struggling to match the returns of the benchmark, there are few funds that have the potential to constantly generate alpha for its investors. And we have identified five such high alpha generating funds, in our latest report 'The Alpha Funds Report 2020'. Do not miss our latest research finding. Get your access to this exclusive report, right here!

Note:  This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

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