PGIM India Midcap Opportunities Fund: Benefitting from Quality Mid-cap Stocks

Jun 30, 2022

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Midcap companies have the potential to become the large-caps of tomorrow, which gives Mid-cap Funds a higher upside potential and the ability to create significant wealth for the investors. These funds tend to outperform Large-cap Funds over the long run.

However, remember that Mid-cap Funds can plunge lower than Large-cap Funds during bearish market phases. Therefore, when you invest in Mid-cap Funds, prefer schemes that focus on picking quality stocks in the segment instead of chasing momentum-driven bets.

PGIM India Midcap Opportunities Fund is one of the well-managed funds in the Mid-cap Fund category that has turned out to be an outperformer through its focus on identifying quality mid-cap stocks.

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

PGIM India Midcap Opportunities Fund holds an overweight position on underbought sectors and diversifies its portfolio in about 50 to 55 stocks spread across companies showing stable growth, high growth, and turnaround stories. Launched in December 2013, PGIM India Midcap Opportunities Fund remained among the underperformers in its first 5 years. Focusing on high-quality stocks, it recorded a major breakthrough outperformance during the market crash in 2020 and stood strong among the category outperformers. Moreover, the fund participated in the bounce-back rally and has turned out to be one of the top performers, not only in the Mid-cap Fund category but across diversified equity funds. Over the past 5 years, PGIM India Midcap Opportunities Fund has rewarded investors with a CAGR of around 17.8%, as against 12.5% CAGR delivered by its benchmark Nifty Midcap 150 - TRI index. Thus, the fund has recorded a healthy alpha of around 5 percentage points in CAGR compared to the benchmark.

Graph 1
Past performance is not an indicator of future returns
Data as on June 28, 2022
(Source: ACE MF)
 

Table: PGIM India Midcap Opportunities Fund's performance vis-á-vis category peers

Scheme Name Corpus (Cr.) 1 Year 2 Year 3 Year 5 Year 7 Year Std Dev Sharpe
PGIM India Midcap Opp Fund 5,119 7.75 47.72 31.21 17.76 15.58 25.04 0.30
Quant Mid Cap Fund 511 9.91 45.10 29.81 19.27 14.62 24.82 0.28
SBI Magnum Midcap Fund 6,891 8.59 41.18 22.26 12.41 12.91 25.01 0.22
Edelweiss Mid Cap Fund 1,918 1.93 38.35 21.22 14.77 14.17 24.74 0.21
Motilal Oswal Midcap 30 Fund 2,624 21.90 40.86 20.85 12.90 12.51 25.07 0.19
Kotak Emerging Equity Fund 18,655 2.74 37.10 20.45 14.33 15.75 24.04 0.21
UTI Mid Cap Fund 6,373 2.20 34.29 19.93 12.52 12.26 23.75 0.19
Baroda BNP Paribas Mid Cap Fund 1,116 1.12 33.26 19.84 12.16 13.11 22.85 0.20
Mahindra Manulife Mid Cap Unnati Yojana- 889 -0.08 31.95 19.74 -- -- 22.61 0.21
Axis Midcap Fund 17,165 0.22 27.49 19.39 17.24 14.29 19.66 0.21
Nifty Midcap 150 - TRI 0.35 34.09 17.98 12.52 14.08 26.00 0.17
Returns are point to point and in %, calculated using the Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on June 28, 2022
(Source: ACE MF)
*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.
 

PGIM India Midcap Opportunities Fund has registered superior performance in the last few years and has managed to generate an alpha of around 7% to 13% CAGR over its benchmark Nifty Midcap 150 - TRI Index. The recent outperformance has helped the fund improve its long-term performance as well, and it has managed to generate a significant lead over the category average and the benchmark across time periods. Over longer time periods of 5-year and 7-year, the fund has a clear lead over its benchmark and the category average.

On risk-return parameters, PGIM India Midcap Opportunities Fund has encountered higher volatility (25.04%) when compared to its category peers but is still much lower than the benchmark. The fund's superior outperformance over the last few years has helped it generate higher risk-adjusted returns for investors. Its Sharpe ratio (0.30) is currently the highest in the Mid-cap Funds category.

PGIM India Midcap Opportunities Fund: Benefitting from Quality Mid-cap Stocks
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Investment strategy of PGIM India Midcap Opportunities Fund

PGIM India Midcap Opportunities Fund is a midcap fund that is mandated to invest a minimum of 65% of its assets in mid-cap stocks (defined as stocks between 101 to 250 ranked as per market capitalisation), whereas a maximum of 35% in stocks of other companies, as well as Cash, Money Market, and Debt Securities. The fund looks to identify quality midcap stocks which can benefit from a favourable economic environment based on extensive research and a thorough selection process.

PGIM India Midcap Opportunities Fund follows a combination of the top-down and bottom-up approach to select quality mid-cap stocks across sectors and gives higher weightage to valuation parameters as well as growth, margins, asset returns, and cash flows, amongst others.

The fund holds top 40%-45% of its portfolio in 'Stable Growth' stocks i.e. companies with stable earnings and strong earnings visibility (of 14-16%); mid 40%-45% of the portfolio is in 'High Growth' stocks i.e. companies with strong earnings growth (of above 20%); and bottom 10%-20% of the portfolio in 'Turnaround' stocks i.e. Turn around stories and good companies going through bad times with significant potential for alpha generation.

PGIM India Midcap Opportunities Fund invests in a well-diversified portfolio of 50-55 stocks, limiting exposure to single stocks within the 5% mark. Although the fund follows a buy-and-hold investment strategy, it is nimble in its approach and does not hesitate to churn a small portion of its portfolio to capture attractive opportunities in the mid-cap segment. In the last 12 months, PGIM India Midcap Opportunities Fund has registered a turnover ratio between 100% to 140%.

Graph 2: Top portfolio holdings in PGIM India Midcap Opportunities Fund

Graph 2 Graph 2
Holding in (%) as of May 31, 2022
(Source: ACE MF)
 

As of May 31, 2022, PGIM India Midcap Opportunities Fund held a fairly diversified portfolio of 48 stocks. The top-10 stocks accounted for around 35.3% of its assets, with names like ABB, HDFC Bank, TVS Motor Company, Timken India, Persistent Systems, Ashok Leyland, Cummins India, Varun Beverages, Dalmia Bharat, Bharat Forge, etc. appearing in its top 10 holdings.

In the last one year, PGIM India Midcap Opportunities Fund has gained the most from its holding in The Indian Hotels Company, SKF India, L&T Technology Services, Sagar Cements, Cummins India, and Coforge, among others. It has also booked substantial profits in stocks like Dixon Technologies (India), Mphasis, Quess Corp, Jubilant FoodWorks, Polycab India, IRCTC, MTAR Technologies, etc.

PGIM India Midcap Opportunities Fund is benchmark agnostic, holding a low overlap of 30%-35% with the benchmark and is overweight on sectors which are currently underbought. In terms of sector holdings, the fund's portfolio is majorly exposed to Engineering (18.5%), followed by Banking & Finance stocks with a combined allocation of about 14.5%, followed closely by Pharma, Auto, Infotech, Consumption, and Consumer Durables with an allocation of around 4% to 8%.

 

Suitability

PGIM India Midcap Opportunities Fund has shown a turnaround performance in the last few years and has the potential to generate market-beating returns in the long run at a reasonable risk. The fund focuses on investing in high-quality growth stocks of mid-sized companies. The nimble approach followed by the fund managers helps it take advantage of stock and sectoral rotations during positive as well as negative market conditions.

Even though the fund follows an active investment strategy and has a penchant to churn a major portion of its portfolio, it has shown a lot of patience with many of its quality stocks and sectorial bets, which have paid off its investors in due course. Such an approach may work in favour of the fund in the long run.

PGIM India Midcap Opportunities Fund is suitable for investors with a high-risk appetite looking for an actively managed Mid-cap Fund with an investment horizon of at least 5-7 years.

 

Warm Regards,
Divya Grover
Research Analyst

 

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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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