These are the go-anywhere funds. There are no fences drawn as to the market cap tilt that the portfolio must have, so fund managers have the flexibility to chase any market cap that they desire. When the market favours a particular market cap, they will hop onto that bandwagon to earn that extra return. As a result, such a fund can resemble a pure large cap offering. Other times, a mid cap offering. Or maybe, even a blend of both.
Ideally a multi cap fund manager should be able to capture the market trends and alter the portfolio's complexion accordingly. This should result in better returns than a pure large cap or a pure mid cap fund. Broadly it has worked. During market downturns, they will stand taller than mid cap funds while during mid cap rallies, they will trounce their large cap counterparts.
During the recent market downturn (January 8, 2008 to March 9, 2009), 79 per cent of the funds in this category were able to contain their losses at a lower level than the average mid cap category loss. While in the recent rally (March 9, 2009 - March 31, 2010), the category average of multi cap funds was 111 per cent while that of large caps was 92 per cent. In fact, 81 per cent of the funds in this category were able to deliver ahead of large cap funds. In the market downturn, they fared worse than the large cap category but better than the mid cap one, and in the upturn, they did not match up to the mid and small cap category but were ahead of the large cap category.
These are broad market generalisations. Actual fund performance will depend on the fund manager's call and his ability to move swiftly.
Take Taurus Starshare. Between February 2009 and February 2010, allocation to large caps moved between 61 per cent and 16 per cent. The fund delivered 118 per cent (March 9, 2009 - March 31, 2010). But his earlier call backfired (January 8, 2008 - March 9, 2009) and he fell harder than the category average. His large cap allocation actually fell to around 34 per cent in October 2008 from around 62 per cent in January 2008. Tata Equity PE has seen its large cap allocation range between 60 per cent and 20 per cent. Its returns have been impressive.
On the other hand, there are funds like HDFC Growth which stay pretty range bound in terms of market cap allocation. Since 2006, the allocation to large caps has hardly dropped below 50 per cent and has not exceeded 65 per cent.
Take a look at how the winners stand out.
Arriving at the multi-cap universe
1. From the entire universe of equity funds, thematic and sector funds were excluded; such as Infrastructure, Banking, FMCG, Pharma, Infotech, Power, Auto and Media & Entertainment. Funds with a global exposure were also bypassed along with equity linked savings schemes (ELSS).
2. The balance equity funds were further categorised on the basis of their market capitalisation exposure.
3. According to their market capitalisation exposure, they were classified as Large Cap, Large & Mid Cap, Mid & Small Cap, and Multi Cap. As per our definition, stocks accounting for the top 70 per cent of the market capitalisation of the BSE are classified as large cap. The next 20 per cent are mid cap and the remaining 10 per cent are small cap.
4. The funds that fell into the Multi Cap category were those that had an exposure of 40-60 per cent of their equity portfolio to large cap stocks. To arrive at this figure, the complete portfolios of March and September were considered over a 3-year time frame.
5. The final list of Multi Cap funds was a diverse group of 56, including opportunity funds, contra funds and dividend yield funds. It's interesting to note that HDFC Mutual Fund has four funds that fall in this category, out of which two feature in our recommendation list of 8.
6. The final recommendations are on the basis of their rating score over 3- and 5-year periods.
Rallies, Crashes & Market Caps
In the market rally that started mid-2006, it was large caps that set the pace. That year, the Sensex delivered 47 per cent while the BSE Mid Cap and Small Cap indices delivered 31 per cent and 16 per cent, respectively. But the initial leg of the rally was totally dependent on large caps. For the 6-month period as on November 23, 2006, the Sensex delivered 32 per cent while the BSE Small Cap and BSE Mid Cap delivered paltry returns of 1.82 per cent and 11.14 per cent, respectively.
However, the smaller fare did not lag behind for long. In 2007, BSE Small Cap and BSE Mid Cap outperformed the Sensex (47%) with returns of 94 per cent and 69 per cent, respectively.
In the subsequent market crash (January 8, 2008 to March 9, 2009) the Sensex lost 52 per cent while BSE Small Cap (-72%) and BSE Mid Cap (-67%) were hit harder.
During the current rally (March 9, 2009 to March 31, 2010) , the Sensex delivered 106 per cent while BSE Small Cap turned in a whopping 179 per cent and BSE Mid Cap was up by 152 per cent.
This article appeared in the April 15 - May 14, 2010 issue of Mutual Fund Insight