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Citrus Analysis: Sundaram Select Midcap Fund: Good track record
Mon, Mar 11, 2013
Source : Jeni Shukla, Citrus Interactive

Sundaram Select Midcap Fund is a mid- and small-cap growth fund. Currently it has assets under management worth Rs. 2,027.92 crore. The fund was launched on July 19, 2002 and is benchmarked against the BSE Midcap Index.

Fund Performance

 

YTD

1-YEAR

3-YEAR

5-YEAR

SINCE INCEPTION

Sundaram Select Midcap

-9.42

7.24

6.42

5.66

29.48

BSE Midcap

-11.39

-0.23

-0.50

-3.95

21.69

All figures are in %, as on February 28, 2013; Returns above one-year in CAGR

The fund shows an impressive performance compared to its benchmark year-to-date as well as over the one-, three- and five-year periods. It is also ahead of its benchmark in terms of its return since inception.

 

2012

2011

2010

2009

2008

Sundaram Select Midcap

38.02

-23.67

20.76

109.26

-58.94

BSE Midcap

38.52

-34.19

16.15

102.40

-67.44

Out/under Performance

-0.5

10.52

4.61

6.86

8.5

All figures are in %


In terms of calendar year returns the fund has shown consistency by beating the benchmark in all the last five years except 2012, the underperformance being marginal in 2012.  The fund manager S. Krishnakumar says, “A note worthy aspect of the fund is its strict adherence to the mid cap mandate. The focus in the mid-cap space has been and will continue to be on well-run companies with growth prospects – organic and inorganic – at reasonable valuation levels. The portfolio stance is linked to what we perceive will be the significant opportunities over the next few years.”

Investment Philosophy and Approach

According to the fund manager, “The objective of the scheme is to achieve capital appreciation by investing in diversified mid-cap stocks. The fund will seek capital appreciation by investing in high growth sectors in the mid-cap space. Emphasis on growth, as Sundaram Asset Management believes such a style will be appropriate in the high-growth economy that is India, and we are still at an early stage in the higher growth path. There is strict adherence to mid-cap mandate of the fund; the fund does not invest in stocks with a market cap higher than that of the 51st stock in the NSE.

The fund uses a bottom-up approach, maintaining a fully-invested status unless warranted by exceptional circumstances. We go for ownership of companies that normally offer a high degree of comfort on quantitative and qualitative parameters. No single stock normally exceeds 5% of assets.”


Portfolio Characteristics

Number of equity holdings. The fund has 59 stocks in its portfolio against the category median of 41. The fund’s equity holdings averaged 66 in 2008, 55 in 2009 and 50 in 2010 and 2011 and 59 in 2012. It has historically held more stocks than the category median.  

Sector Concentration. The fund’s concentration in the top three, five and 10 sectors is lower than the category median.

 

Top 3

Top 5

Top 10

Sundaram Select Midcap

28.19

40.36

63.53

Category Median-Diversified Equity

34.24

47.59

68.49

 

Company Concentration. The fund’s concentration in the top three, five and 10 companies in its portfolio is lower than the category median.

 

Top 3

Top 5

Top 10

Sundaram Select Midcap

17.25

25.40

40.90

Category Median-Diversified Equity

18.41

28.03

45.52

 

Thus, based on these three criteria—number of equity holdings, sector concentration and company concentration—one can conclude that the fund maintains a well-diversified portfolio.

Turnover Ratio. The fund’s turnover ratio of 49 per cent is lower than the category median of 54 per cent (based on data of funds who have disclosed their turnover ratio recently). This suggests that the fund's turnover ratio has been on a downward trend from 134 per cent in 2009, 105.3 per cent in 2010, 78.4 per cent in 2011 and 46 per cent in 2012.

Says the fund manager: “The top holdings of the portfolio have returned reasonably well in the last 12-18 months. Consequently, we have been able to hold on to these stocks for a significant period of time resulting in low turnover ratio.”

Expense Ratio. The fund’s expense ratio is 1.89 per cent which is lower than the category median of 2.56 per cent.

Risk. In terms of measures of risk such as standard deviation and beta (measured over last three years), the fund has a lower level of risk compared to the category median.

 

Standard Deviation

Beta

Sundaram Select Midcap

0.9185

0.6694

Category Median

0.9447

0.8078

 

Risk-adjusted Returns. In terms of measures of risk-adjusted return such as Treynor ratio and Sharpe ratio (measured over last three years), the fund has higher risk-adjusted returns compared to the category median.

 

Treynor

Sharpe

Sundaram Select Midcap

0.0342

0.0306

Category Median

0.0237

0.0283

 

Portfolio Strategy

In the last one year the fund has increased allocation to banks, auto ancillaries, cement, pharmaceuticals, software and industrial products. It has lowered allocation to gas, textile products, finance and consumer non-durables. According to Krishnakumar, “We thought the PSU banking space will go through a phase of high credit cost and lower earnings growth. Hence, we increased exposure to NBCFs and retail finance where credit and earnings growth have been strong. We believe the mid-cap IT segment is doing better than the large cap IT counter parts. Hence, we had higher weights. We have made stock specific exposure to auto ancillaries. Stocks like Bosch and Wabco we like due to their technology superiority and strong pricing power. We believe cement sector’s medium-term growth is going to be good with attractive valuations”

               

Sector

Jan-12 (%)

Jan-13(%)

Raised/lowered allocation (%age points)

Banks

3.63

11.87

8.24

Auto Ancillaries

5.06

12.25

7.19

Cement

0.58

5.28

4.70

Pharmaceuticals

5.34

8.38

3.04

Software

4.67

5.97

1.30

Industrial Products

5.99

6.11

0.12

Consumer Non Durables

9.22

8.25

-0.97

Finance

9.84

8.86

-0.99

Textile Products

5.73

4.26

-1.47

Gas

9.14

6.20

-2.94

 

Fund vs. Benchmark – January 2013

Sector

Fund (%)

S&P BSE Midcap (%)

Over/under weight (%age points)

Auto Ancillaries

12.25

4.10

8.15

Gas

6.20

1.39

4.81

Textile Products

4.26

1.13

3.13

Cement

5.28

2.25

3.03

Industrial Products

6.11

4.76

1.35

Software

5.97

5.09

0.88

Pharmaceuticals

8.38

7.81

0.57

Banks

11.87

12.38

-0.51

Consumer Non Durables

8.25

9.04

-0.79

Finance

8.86

10.35

-1.49

 

By the end of January 2013 the fund was overweight its benchmark on sectors like auto ancillaries, gas, textile products, cement, industrial products, software and pharmaceuticals. It was underweight compared to its benchmark on finance, consumer non-durables and banks.

Company

Jan-12 (%)

Jan-13(%)

Raised/lowered allocation (%age points)

Karur Vysya Bank Ltd.

 

3.64

3.64

Amara Raja Batteries Ltd.

1.51

4.93

3.42

Mahindra Satyam Ltd

 

3.21

3.21

Madras Cements Ltd.

 

2.80

2.80

Ipca Laboratories Ltd.

5.34

7.42

2.08

Bajaj Finserv Ltd

1.51

2.73

1.23

Bajaj Finance Ltd.

1.99

3.12

1.14

Bosch Ltd

3.53

4.34

0.80

FAG Bearings India Ltd.

4.14

4.90

0.76

Indraprastha Gas Ltd.

4.92

3.80

-1.12

 

Among its top holdings the fund increased its exposure to Karur Vysya Bank, Amara Raja Batteries, Mahindra Satyam, Madras Cements, Ipca Laboratories, Bajaj Finserv, Bajaj Finance, Bosch and FAG Bearings. It lowered its allocation to Indraprastha Gas.

Fund Manager

The fund is managed by S. Krishnakumar since November 1, 2012. Krishnakumar has been with Sundaram AMC since December 2003. The other funds managed by him include Sundaram S.M.I.L.E.Fund, Sundaram Energy Opportunities and Sundaram Equity Multiplier. Satish Ramanathan (then Director and Head of Equities at Sundaram AMC) managed the fund from October 2007 to October 2012.

According to Krishnakumar what sets the fund apart is: “India’s first fund dedicated only to mid-cap stocks with an impressive track record of ten years plus and a good track record across bullish and bearish phases.”

Conclusion

Over the years the fund has been consistent with its performance. However, the fund needs some catching up to do from its performance in 2012 to be in the league of the best mid-cap focused funds and to replicate the outperformance it demonstrated in previous years.  

 
 
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