Large cap equity schemes an analysis :

Scheme characteristics : As per the categorisation and rationalisation of mutual fund schemes prescribed by SEBI, large cap scheme is one where “minimum investment in equity & equity related instruments of large cap companies should be 80% of total assets”. Large cap universe is also defined clearly, which is 1st to 100th company in terms of full market capitalisation. At present there are 30 large cap schemes, open ended, open to new investments.

The objective of the analysis is to list out schemes under broad categories a) Likely challengers b) Likely out performers c) Watchlist & d) Likely outliers. The difference between likely challengers and likely out performers is very little and predominantly lies in previous year returns. It should be carefully noted that these are not recommendations for investing and investors are expected to consult their financial advisors for right advice and action.

The analysis is based on parameters that are broadly classified as a) pertaining to past performance b) future estimates and c) current valuation & other metrics. It is a well known fact that past performance alone is not an indicator for future. Similarly, metrics used to get an idea of how the portfolios would shape up are mostly estimates. No single parameter would provide us the direction towards a decision to buy, hold or sell. It is the combination of all these parameters that are used to arrive at a decision.

Ratios pertaining to past performance : The following were used to get an idea of how the schemes delivered in the past. These are not the only ratios that are important. There may be different methodologies to analyse which may have merits. I do not claim that this is a superior model. Selecting schemes is not a science neither an art. It is a craft which gets better with experience. Let us take a look at the ratios used – Downside capture ratio (1 year period), Downside capture ratio (3 year period), Information ratio (1 year period), Information ratio (3 year period), Current and previous two calendar year returns.

Rationale behind using above ratios : Investors in general focus on short term performance and lose out on long term gains. This creates “behaviour gap“, the gap between fund returns and investor returns. To address early untimely exits from a scheme, funds with low downside capture ratios have to be chosen. Information ratio is a better measure than Sharpe ratio. Information ratio, measures the fund’s performance relative to its benchmark and adjusts it for the volatility in the dispersion between the two. Calendar year returns provide more clarity and is a better measure than CAGR, in my opinion. By looking at CY returns, you are in a position to understand the ups and downs easily than CAGR which could be misleading for laymen.

Current valuation parameters : I have taken PE (price to earnings of portfolio), PBV (price to book value of portfolio), PC (price to cash flow of portfolio), cash calls, market cap wise break up, total number of holdings in the portfolio and weightage of top 10 stocks in the portfolio.

Rationale behind using above : PE, PBV and PC provide an idea of how costly or cheap the portfolio is currently. Cash as hedge is a strategy for a few but in my opinion, lower the cash levels better rating would be given as money given is for equity exposure. Asset allocation is the responsibility of the investor / advisor as the case may be. So, cash weightage in the portfolio is important. The total number of holdings in the portfolio too is critical for delivering performance. Long tails and extra diverse portfolios could end up being mediocre performers.

Future estimates : As we all know this is the uncertain part. Despite all right ingredients, a dish could not turn out well at times ! Like cooking, here also uncertainty prevails. Long term earnings (3 year) estimate, Book value growth and expected dividend yield of the portfolio are taken based on estimates. Future performance of any portfolio depends on long term earnings, dividend yields and book value growth. In addition to these, positioning the portfolio across prospective sectors depending on market conditions adds up to out performance.

Let us look at the numbers now

Sl No.Likely Out performersLikely ChallengersLikely outliersWatchlist
1Canara Robeco Bluechip Equity FundIDFC Large Cap FundL&T India Large Cap FundICICI Prudential Bluechip Fund
2BNP Paribas Large Cap FundPGIM India Large Cap FundAxis Bluechip FundHDFC Top 100 Fund
3Mirae Asset Large Cap Fund
4DSP Top 100 Equity Fund
The Elite List

https://drive.google.com/file/d/1vGhFV5XE7HvoQ1_FPrU1WXYQsZP1GZAU/view?usp=sharing is the link to the file containing various parameters…

Canara Robeco Bluechip Equity Fund : is a 335 Crore sized fund, with 44 holdings and 48% exposure to top 10 stocks. Cash held as on Mar 31, 2020 is very close to 8.3%. YTD, this has fallen less than the category average. 2019 and 2018 were very good in terms of performance. Very good and steady downside protection is seen over 1 and 3 year periods. PE and PBV are costly but long term expected earning is attractive. Portfolio seems well positioned for sustained out performance.

BNP Paribas Large Cap Fund : is a 660 Crore sized fund, with 34 holdings and 54% exposure to top 10 stocks. Cash held as on Mar 31, 2020 is very close to 9.5%. YTD, this has fallen less than the category average. 2019 was good and 2018 below average in terms of performance. Good downside protection is seen over 1 and 3 year periods. PE and PBV are costly but long term expected earning is attractive. Portfolio seems well positioned for sustained out performance.

IDFC Large Cap Fund : is a 352 Crore sized fund, with 40 holdings and 60% exposure to top 10 stocks. Cash held as on Mar 31, 2020 is very close to 6.6%. YTD, this has fallen less than the category average. 2019 and 2018 were below average in terms of performance. Good and steady downside protection is seen over 1 and 3 year periods. PE and PBV are costly but long term expected earning is very attractive. Portfolio seems well positioned for sustained out performance with 50% weightage to cyclicals. This could prove to be a worthy challenger to the current top performers soon.

PGIM India Large Cap Fund : is a 238 Crore sized fund, with 50 holdings and 67.5% exposure to top 10 stocks. Cash held as on Mar 31, 2020 is very close to 5%. YTD, this has fallen in line with the category average. 2019 was good and 2018 below average in terms of performance. Reasonable downside protection is seen over 1 and 3 year periods. PE and PBV are costly but long term expected earning is extremely attractive. Portfolio seems well positioned for out performance. This could prove to be a worthy challenger to the current top performers sooner than later.

L&T India Large Cap Fund : is a 410 Crore sized fund, with 61 holdings and 49% exposure to top 10 stocks. Cash held as on Mar 31, 2020 is very close to 3.1%. YTD, this has fallen more than the category average. 2019 was good and 2018 below average in terms of performance. Average downside protection is seen over 1 and 3 year periods. PE and PBV are costly but long term expected earning is very attractive. Portfolio seems well positioned for a surprise turnaround in performance. Hence, gets in to the league of outliers.

Axis Bluechip Fund : is a 10997 Crore sized fund, with 34 holdings and 55.23% exposure to top 10 stocks. Cash held as on Mar 31, 2020 is very close to 19.73%. YTD, this has been one of the top performers. 2019 and 2018 were very good in terms of performance. Excellent and steady downside protection is seen over 1 and 3 year periods. PE and PBV are very costly but long term expected earning is extremely attractive. Portfolio seems well positioned for sustained out performance. If at all this fails to impress, it could be because of cash calls / the bulging size / costly in terms of valuation. I still believe this could pleasantly continue to surprise us with performance.

ICICI Pru Bluechip, HDFC Top 100 are two funds with extremely attractive valuations (PE, PBV and Dividend Yield). Both follow the value strategy that has brought the performance to below average in the previous couple of years. The ability of the fund management team to turnaround the performance is one factor that puts these two under watchlist despite a shallow performance of late. The mega size is also continuing to have an impact in my opinion. Mirae Asset Large Cap is also an attractive one with relatively good valuations. The increasing size and a long portfolio may pose challenges, in my opinion. But worthy of a place in the watchlist.

Disclaimer : This is not a recommendation to buy or sell a fund and this should be read as an analysis. Investors are advised to consult their financial advisors to check the suitability of these schemes for investing based on their investment agenda.

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