Identifying Quality Stocks in the Midcap Segment

Dec 29, 2022

Reading Time: 10 min

PGIM India Midcap Opportunities Fund is a well-managed Midcap Fund that has turned out to be one of the top performers in the category by focusing on quality stocks in the mid-cap segment.

Past performance is not an indicator of future returns

Data as on December 27, 2022

(Source: ACE MF)

PGIM India Midcap Opportunities Fund has registered superior performance in the last few years and has managed to generate an alpha of around 6% to 12% CAGR over its benchmark Nifty Midcap 150 – TRI Index. The recent outperformance has also helped the fund improve its long-term performance as well and has managed to generate a significant lead over the category average and the benchmark across time periods. On a 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 (24.42%) when compared to some of 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 (0.38) is currently the highest in the Mid-cap Funds category, thus rewarding investors with superior risk-adjusted returns.

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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). 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. While selecting stocks the fund managers look at the current and historical financial condition of the company, potential value creation/unlocking of value and its impact on earnings growth, capital structure, business prospects, policy environment, the strength of management, responsiveness to business conditions, product profile, brand equity, market share, competitive edge, research, technological know-how, and corporate governance.

The fund holds top 40%-45% of its portfolio in ‘Stable Growth’, 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. As of November 30, 2022, PGIM India Midcap Opportunities Fund held a fairly diversified portfolio of 47 stocks. The top-10 stocks accounted for around 33.6% of its assets, with names like Timken India, HDFC Bank, ICICI Bank, Cummins India, Kajaria Ceramics, Bata India, and Dalmia Bharat among its top 10 holdings. Although the fund follows a buy-and-hold investment strategy, it is nimble in its approach. It does not hesitate to churn a small portion of its portfolio to capture attractive opportunities in the mid-cap segment.

In the last one year, PGIM India Midcap Opportunities Fund has gained immensely from its holding in Timken India, Varun Beverages, Cummins India, The Federal Bank, ABB India, The Indian Hotels Company, ICICI Bank, TVS Motor Company, Canara Bank, Ashok Leyland, SKF India, among others.

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, its portfolio is majorly exposed to Banking & Finance, Engineering, and Consumption, that collectively account for 45.1% of its assets. The fund’s other core sectors include Construction, Consumer Durables, Pharma, Chemicals, Infotech, Auto, Retail, and Transportation, among others.

Suitability

PGIM India Midcap Opportunities Fund’s performance is driven by prudent investment strategies and backed by strong systems and processes followed at the fund house. The fund has shown a turnaround performance in the last few years and has showcased its potential to generate market-beating returns in the long run at a reasonable risk.

As PGIM India Midcap Opportunities Fund is benchmark agnostic, the investments in stocks shortlisted using various parameters are typically made at the conviction of the fund manager, irrespective of their weightage in the index. Certainly, the performance of the fund may deviate significantly from the benchmark. Even though PGIM India Midcap Opportunities 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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Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989.

QIS was promoted by Mr Ajit Dayal with an objective of providing value-based information/views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.

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