Small and midcap equity funds outperformed other category of equity funds for the second consecutive quarter ended September 2011 as per Crisil. According to market participants, the outperformance was possible due to relatively lower equity exposure (or higher cash levels) and better stock picking by small and midcap fund managers. The small and midcap funds gave a negative return of 6.83% as compared with negative return of 10.48% by largecap funds and of 10.01% by diversified funds during the quarter ended September.
The benchmark indices S&P CNX Nifty and S&P CNX 500 indices gave a negative return of 12.47% and 12.04%, respectively, during the September quarter to post the lowest quarterly returns over the last eight quarters. The fall in the largecap stocks was more as against midcap stocks over the last two quarters, as observed from the returns of the respective benchmark indices for the June and September quarter. ?S&P CNX Nifty by virtue of having a higher weightage in sectors like commodities, banking and information technology vis-?-vis the CNX Midcap Index (which is more diversified) saw a higher decline. The global uncertainty has severely impacted stocks in these sectors in the last two quarters? said the Crisil report.
Sethuram Iyer, CIO at Daiwa MF says, ?We can attribute better quarterly performance of the small and midcap funds to stock picking by the fund managers. Many of the small and midcap stocks have given significant higher returns or lower returns, while largecap stock funds have been average performers.?
Jiju Vidyadharan, head ? funds and fixed income research at Crisil says, ?Given the current uncertain environment, the average equity holding of equity funds has gone down from 95% as on September 30, 2010 to almost 93% as on September 30, 2011.
Historically, the strategy of lowering the equity exposure has helped equity funds cushion the downside for a limited period. ?Equity funds, by their very mandate, should be fully invested. In the event of a market reversal, funds with a higher equity exposure are likely to outperform the broader markets. This was also observed when markets turned around post the 2008 global credit cum liquidity crisis?, added Vidyadharan.
Equity markets globally have seen a downtrend on slowdown in the global economy and the EU debt crisis. Indian markets too have been impacted by global issues, with domestic factors like high inflation and rising interest rates weakening market sentiments.