Large Cap Funds invest a minimum of 80% of assets in stocks that rank 1st to 100th company in terms of full market capitalization. There are 33 Large Cap funds in the industry. The category accounts for 17% or Rs 1.97 lakh crore of the total Rs 11.44 lakh crore assets under management in open-ended actively managed equity funds as of July 2021. Here’s an analysis and a brief overview of two Large Cap Funds that we analysed recently.
Mirae Asset Large Cap Fund
- Star Rating: 5 stars
- Analyst Rating: Bronze (Regular Plan)
- Fund Manager: Harshad Borawake and Gaurav Misra
- Inception: April 2008
- Return: 49.22% (1 year), 14.83% (3 year), 15.99% (5 year), 17.70% (10 year), 16.47% (since inception). Return of regular plan as on August 31, 2021
- Date of Analysis: August 2021
- Number of stocks: 60
- Assets in top 10 holdings: 55%
- Assets under management: Rs 27,435 crore (July 2021)
- Investment Style: Large Blend
- Total Expense Ratio: 1.64% (regular), 0.54% (direct)
- Fund Overview
The fund has endured some changes in the team over the past few years. The fund was earlier managed by Neelesh Surana and head of research Harshad Borawake. However, Gaurav Misra took the reins as the lead manager in January 2019, and later in January 2020, Surana gave up responsibilities on this fund to focus more on other strategies and his additional duties as equity CIO.
The fund was recategorised as a large-cap offering since May 2019. However, the change is not a concern given the fund's historical large-cap tilt with a focus on high-growth companies at reasonable prices. The investment philosophy of the fund is built on three core principles: quality businesses with stable earnings, strong management, and attractive valuation.
The process includes both quantitative and qualitative stock screening with bottom-up stock-picking. The sector selection is done through a top-down approach mainly based on growth prospects. Analysts then assess stocks at the industry and company levels and focus on key drivers such as returns on capital employed, returns on equity, and EBITDA margin. Within the framework, there is a lot of emphasis on qualitative analyses like management quality and execution capabilities. These are quantified by evaluating the trailing 10-year track record, which helps in removing subjectivity.
The fund's alpha is generated through stock selection rather than sector rotation. The portfolio manager strives to beat the benchmark, position in the right quartile, and provide absolute return. Despite being launched in the midst of the 2008 global financial crisis, the fund has generated steady returns across all market cycles and emerged as a consistent first-quartile performer by beating most of its peers by a wide margin.
UTI Mastershare Unit
- Star Rating: 4 stars
- Analyst Rating: Bronze (Regular Plan)
- Fund Manager: Swati Kulkarni
- Inception: October 1986
- Return: 54.10% (1 year), 14.79% (3 year), 14.59% (5 year), 14.28% (10 year), 16.12% (since inception). Return of regular plan as on August 31, 2021
- Date of Analysis: August 2021
- Number of stocks: 47
- Assets in top 10 holdings: 47%
- Assets under management: Rs 8,580 crore (July 2021)
- Investment Style: Large Growth
- Total Expense Ratio: 1.03% (regular), 1.99% (direct)
- Fund Overview
UTI Mastershare Unit is a large-cap-focused fund with a growth style. Swati Kulkarni invests predominantly in reasonably priced leading businesses of large-caps from the benchmark index, the BSE 100. The process is methodical and cohesive. The fund takes a top-down approach for sector weights and uses a bottom-up view for stock selection. The initial investment process is to determine which companies have generated higher operating profits and demonstrated a long-term return on equity.
The team emphasises the trends and patterns discerned from historical performance rather than from forecasts. From a qualitative aspect, the focus is on strong management, the company’s business model, and competitive advantages. The investment team meets regularly to discuss and narrow the investing field. They are currently tracking about 315 stocks. Kulkarni relies on relative valuations for evaluating stocks, deploying measures such as price/earnings, price/book value, and EV/EBITDA, though she also invests in stocks that she considers to be fairly valued if she is convinced about their earnings growth or in her quest for a quality business. She does not drastically move away from the benchmark and at the same time also takes active calls on benchmarks, sectors, and stocks. The investment strategy is uncomplicated, but Kulkarni’s execution, especially in the testing markets of 2011, 2015, and 2018, has been noteworthy.
The fund’s risk/reward profile is encouraging because of Kulkarni’s key focus on risk management while constructing the portfolio. The fund is suitable for conservative investors who want consistent dividends, even during market downswings. It offers downside protection: Over a five-year period, its downside capture rate (relative to the benchmark index) had been 94%, compared with an upside capture rate of 92%. But it must be held for longer periods to work well.
