Fund managers confident on growth on small and mid cap

Most fund managers have parked nearly half their assets in mid- and small-cap stocks despite their recent underperformance, data from a mutual fund tracking firm showed.

This, fund managers say, is because they expect these stocks to catch up with their large-cap counterparts in the next six-nine months.

"On a historic basis, mid-caps are looking cheap versus the large-caps. On forward basis they were always cheap. So there's definitely a valuation gap," Prateek Agrawal, head-equities, ABN AMRO Asset Management (India) Ltd., said.

Diversified equity funds had 43.79 per cent of their assets parked in mid- and small-cap stocks at end-September, according to data from Value Research.

While India's benchmark Sensex wiped out all its losses since its May 11 peak and was a net 5.27 per cent higher on Nov. 2, the BSE Mid-cap and BSE Small-cap indices were down 8.90 per cent and 16.32 per cent respectively.

"Money is coming in, market indices are at a high...mid-caps part of the markets should really do well," Agrawal said, adding that there was lot of opportunity in engineering, construction, real estate and mid-cap pharma sectors.

Not only have fund managers maintained their optimism for mid- and small-caps, investors too seem to believe that the mid-cap story is far from over, fund watchers said.

DSP Merrill Lynch Small and Mid Cap Fund's collection of more than 14 billion rupees during its initial offer period between Sep. 29 and Oct. 18 is an indication of investor interest, they said. The fund house said though it would take some time to invest these funds, it saw enough opportunities in the segment.

"We will take our time to do it (invest) and we do think there's enough choice across different themes and sectors," S. Naganath, President and Chief Investment Officer, DSP Merrill Lynch Fund Managers Ltd., said.

"In the next six to nine months we do expect that they (mid- and small-cap stocks) should play catchup," Naganath said.

The recent rebound in the markets has left a majority of mid- and small-cap stocks untouched, with 70 per cent of the BSE Mid-cap index constituents still trading below their May 11 levels.

Data compiled by broking house Sharekhan showed that while the earnings of the 30 Sensex constituents grew by 27.7 per cent year on year in the second quarter of 2006/07, the same was 35 per cent for BSE 200 companies.

"Over a long period of time in an economy like India, it is still likely that mid-caps will only outperform," said Ved Prakash Chaturvedi, Managing Director, Tata Asset Management Ltd.

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