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Baroda Large and Midcap Fund: Built to Provide Stability and Emerging Opportunities
Aug 20, 2020

Baroda Mutual Fund has launched an open-ended equity scheme, Baroda Large & Midcap Fund. Looking at the current market sentiment, several fund houses are of the view that when large-cap space and midcap space are combined, one gets an opportunity to invest in stability of large-caps and high growth potential of midcaps. Hence even Baroda Mutual Fund launched Baroda Large & Midcap Fund.

The fund house is of the view that, Large and Emerging Bluechip (also popularly known as mid cap) companies benefit directly from GDP growth of the economy. While Investing in Large Cap stocks provide stability, mid cap stocks offer opportunities for higher growth. A Large & Mid Cap Fund offers an optimal mix of both and should form a part of the core investment portfolio.

BREAKING: Here's Investment of the Decade

Baroda Large and Midcap Fund will provide the right mix of Large Caps & Mid Caps to deliver higher growth with lesser volatility. It will even provide better risk-adjusted returns as the Large cap stocks mitigate the volatile nature of the Mid-cap stocks.

[Read: Why Comparing Returns to Risk Is More Meaningful!]

Baroda Large and Midcap Fund will follow the asset allocation limits to allocate its assets between 35% to 65% investment in equity & equity related instruments of large-cap and mid-cap companies each. The fund may also allocate utmost 30% of its assets to equities and equity-related securities of other than large-cap and mid-cap companies with the remaining allocation to debt instruments and money market instruments.

Graph: Risk-return position of Large & Midcap Fund
(Source: Baroda Large & Midcap Fund's Presentation)

Thus, when you plan for long-term goals, want the stability of large-caps along with the agility of mid-caps in the journey of wealth creation, looking for a diversified blended portfolio with above average return potential with relatively less volatility, and accomplishing financial goals; if you have the stomach for moderately high risk, you may skew your equity portfolio to a Large & Mid-cap fund.

Table 1: Details of Baroda Large & Midcap Fund

TypeAn open-ended equity scheme investing in both large cap and mid cap stocks.CategoryLarge and Midcap Fund
Investment ObjectiveTo seek long term capital growth through investments in both large cap and mid cap stocks.
However, there is no assurance or guarantee that the investment objective of the Scheme will be realized
Min. InvestmentRs 5,000 and in multiples of Re 1 thereafterFace ValueRs 10 per unit
Plans
  • Regular
  • Direct

Options
  • Growth*
  • Dividend
    • Pay-out facility
    • Reinvestment facility*
*Default option
Entry LoadNilExit Load

If Units are redeemed:

  • Upto 10% of the Units, on or before 365 days from the date of allotment of Units : Nil
  • Over and above the 10% limit, on or before 365 days from the date of allotment of Units : 1% of the applicable Net Asset Value (NAV)
  • After 365 days from the date of allotment of Units : Nil

Fund ManagerMr Sanjay Chawla and Mr Ashwani Kumar AgarwallaBenchmark IndexS&P BSE 250 Large MidCap 65:35 TRI**
Issue Opens:17 August, 2020Issue Closes:31 August, 2020

**S&P BSE 250 Large MidCap 65:35 TRI Index: Baroda Large & Mid Cap Fund ("said Scheme") offered by Baroda Mutual Fund is not sponsored, endorsed, sold or promoted by India Index Services & Products Limited ("IISL"). IISL does not make any representation or warranty, express or implied (including warranties of merchantability or fitness for particular purpose or use) and disclaims all liability to the owners of the said Scheme or any member of the public regarding the advisability of investing in securities generally or in the said Scheme linked to S&P BSE 250 Large MidCap 65:35 TRI Index or particularly in the ability of the S&P BSE 250

(Source: Scheme Information Document)

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------------------------------

How will the scheme allocate its assets?

Under normal circumstances, it is anticipated that the asset allocation of BLMF will be as follows:

Table 2: BLMF 's Asset Allocation
InstrumentsIndicative Allocations
(% of Total Assets)
Risk Profile
MinimumMaximum
Equity and equity related instruments of large cap* companies (including derivatives)3565High
Equity and equity related instruments of mid cap* companies (including derivatives)3565High
Other equities* and equity related instruments030High
Debt & Money Market Instruments#020Low to Medium
Units issued by REITs/InVITs010Medium to High

*Large Cap: 1st - 100th company in terms of full market capitalization. Mid Cap :101st to 250th company in terms of full market capitalization. Other equities may include small cap stocks. Small Cap : 251st company onwards in terms of full market capitalization. The exposure across these stocks will be in line with limits/classification defined by AMFI/SEBI from time to time.

# Investment in securitized debt will not exceed 20% of the net assets of the Scheme. The Scheme will not invest in foreign securitized debt.

The Scheme may take derivatives positions up to 65% of the net assets of the Scheme, based on the opportunities available, subject to the guidelines issued by SEBI from time to time, and in line with the overall investment objective of the Scheme. These may be taken to hedge or rebalance the portfolio, or to undertake any other strategy as may be permitted under the Regulations from time to time.

(Source: Scheme Information Document)

What will be the Investment Strategy?

The Baroda Large & Midcap Fund seeks to generate long term capital appreciation by investing predominantly in a portfolio of equity and equity-linked securities of large-cap and mid-cap companies. To manage the assets of the Scheme, the investment team will follow an active strategy which would be a combination of a top-down and bottom-up approach.

The investment strategy of the Scheme is as follows:

  1. The Scheme is a large and mid cap equity fund. Within the broader market, the Scheme expects to invest in Large Cap and Mid Cap companies as defined above. The Scheme will invest in equity and equity related instruments of medium and small enterprises of Indian corporates with high management credentials. Special focus will be given to strong corporate governance.
  2. The fund management style will be opportunistic with regards to market capitalization and not from a thematic or sector perspective. Approach to investments in mid-cap stocks would be based on long-term compounding stories at reasonable prices. Long term horizon enables the portfolio to ride the economic / business cycle and to overlook volatility in short term due to external factors.
  3. The Scheme would focus on blue-chip companies with sound financials and market leadership while investing in large cap stocks, and on companies which are likely to have a higher growth element due to their small size and potential for higher product penetration, increasing efficiency and improvement in cash flows, while investing in mid cap stocks.
  4. Portfolio construction would entail a top-down approach towards deciding sector weights benchmarked against the index. Global and domestic economic, fiscal, forex, commodity and various other parameters will be evaluated. Thereafter, the direction of both global and domestic economy will be ascertained along with its impact on various sectors.
  5. The Bottom-up approach is used for identifying companies within the sector. We actively follow GARP strategy (Growth At Reasonable Price) where companies with a potential of above sector growth, improving efficiency and lower valuations are identified and evaluated for investment. Companies trading at a discount to their intrinsic value and have potential to turn around along with the cycle or because of its internal strength are considered to be value picks.

Various fundamental and valuation parameters are considered in terms of revenue, assets and efficiency for identifying sectors and scrips which involves: -

  • Sales growth
  • Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) margin
  • Profit After Tax (PAT) margin
  • Price to Earnings (PE) ratio
  • Price to Book (PB) ratio
  • EV/EBIDTA
  • Dividend Discount Model (DDM)
  • Economic value added, etc.

Who will manage the Baroda Large & Midcap Fund?

Mr Sanjay Chawla is the lead fund manager of Baroda Large & Midcap Fund, and Mr Ashwani Kumar will look into the overseas investments of the scheme

Mr Sanjay Chawla is the Chief Investment Officer of Equities at Baroda Pioneer Asset Management Company Limited. He holds a degree in Master of Management Studies (MMS) from BITS, Pilani. Mr Sanjay Chawla has over 30 years of experience in fund management, equity research and management consultancy. Prior to joining the AMC, he has worked with Birla Sun Life AMC as Sr Fund Manager-Equity, managing various schemes with different strategies. Mr Chawla has also worked as Head of Research with SBI Capital Markets and in various capacities in the equity research space in Motilal Oswal Securities, IDBI Capital Markets, SMIFS Securities, IIT Invest Trust & Lloyds Securities.

He is the lead fund manager at the AMC, few schemes that he manages include Baroda Pioneer Multi-Cap Fund, Baroda Pioneer ELSS'96 Fund, Baroda Pioneer Hybrid Equity Fund, Baroda Pioneer Large cap Fund, Baroda Pioneer Mid-cap Fund, Baroda Dynamic Equity Fund and Baroda Equity Savings Fund.

Mr Ashwani Kumar Agarwalla is a dedicated fund manager for overseas investments. He is a Senior Analyst at the Baroda Asset Management Company. Mr Ashwani has completed his Commerce graduation with Honors, followed by MBA finance and a CFA.

Prior to joining the AMC, Mr Ashwani was working for JM Financial Mutual Fund for 4 years (Aug 2008 to May 2012) as an equity analyst reporting to the Fund Manager, and prior to that, for Pioneer Investcorp Ltd (Dec 2006- Aug 2008) as a sell-side equity analyst, Adventity India as an analyst (Mar 2006 to Oct 2006), and CARE Ratings (May 2005- Feb 2006) also as an analyst.

The outlook for Baroda Large & Midcap Fund:

In order to achieve the objective of the scheme, the Baroda Large & Midcap Fund will be actively managed to invest in Large and Midcap stocks predominantly. Depending upon the fluctuations in the equity markets the market cap exposure will be managed based on the internal framework of Growth at reasonable price (GARP).

The diversity of the investment strategy in the fund allows it to garner significant gains from exposure to Midcaps and provides stability through Large caps stocks. It aims to create an "All Weather Equity Fund".

Diagram: Proposed Investment Strategy
(Source: Baroda Large & Midcap Fund's Presentation)

However, please note that the trailing 12-month P/E of the S&P BSE Sensex and the S&P BSE large-cap index is above 26.6x versus sub-20x levels at the end of March 2020. Although this reading is low when compared to earlier periods; it would be incorrect to term it cheap. When weighed in context with corporate earnings, valuations, particularly in the large-cap segment, appear expensive.

The S&P BSE Mid-cap and S&P BSE Small-cap Indices, on the other hand, are relatively better placed valuation-wise -- much lower than the levels recorded in 2017 and 2018 - offering a somewhat comfortable margin of safety and high growth potential, albeit at higher risk.

[Read: Market P/E Ratio Driving Your Mutual Fund Decisions? Big Mistake!]

A point of caution is that India Inc.'s corporate earnings have been significantly impacted by the COVID-19 pandemic. For Q1FY21 and the ensuing few quarters as well, corporate earnings have largely been impacted due to the COVID-19 pandemic. Only a handful of heavyweights of the bellwether index have kind of lived up to street expectations.

The recovery would be slow and painful for most other companies, as India still hasn't completely unlocked from the lockdown due to increasing COVID-19 cases. It might take a couple of years for complete normalcy to return, and until then the strain on earnings will be visible.

[Read: How Should DIY Investors Go About Investing Amid COVID-19 Crisis?]

For the markets to move up, ultimately earnings need to justify valuations, otherwise, markets may slip back - particularly when liquidity begins to dry up. This, in turn, will also weigh on the performance of the equity-oriented mutual funds subject to their portfolio characteristics.

In such a scenario, set realistic post-tax return expectations from your investment portfolio. Don't get carried away by the earnings trap (where often the near-term estimates are being toned down, while the future earnings estimates are increased).

The performance of the Baroda Large & Midcap Fund relies on the construction of the portfolio. How the fund managers will construct the portfolio is to be assessed, because constructing the portfolio would not be easy amidst the extreme turbulence and may inflict high-risk.

PS: 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!

Author: Aditi Murkute

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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