US Fed’s rate cut in the past week marks a milestone for domestic equity asset class as well. From the sharp slump post-Covid, the markets rallied on liquidity first, then a revenue recovery, followed by commodity cool-off, powering earnings. The liquidity boost by central banks has done a full circle and is now concerned with normalising inflation and stabilising growth prospects. Parallelly for India Inc, the first quarter of this fiscal reported the first organic top- and bottom-line growth, without the benefit of a weak comparable base.
In the Indian context, a period of consolidation is expected in equity markets after the momentous rally of the last five years and large-caps should offer a better refuge. From a market capitalisation perspective, large-caps’ valuation and returns have been on the lower side compared with the other two classes. This should offer better prospects of safety in the consolidation phase.
Within the class itself, the index has got the better of many funds with only a handful beating the index regularly, including Mirae Asset Large Cap Fund. We analyse the long-term performance of the fund and its current composition.
Grounded valuations of large-caps
The last five-year rally has been uneven, largely favouring mid- and small-cap stocks. While the valuations (one-year forward PE) of Nifty-50 stocks are at a 16 per cent premium to last 10-year average, Nifty Midcap 100 stocks are at a 50 per cent premium and Nifty Small cap 100 stocks are at a 36 per cent premium.
Much of the jump in the lower capitalisation stocks has happened in the last five years post-Covid. In the period, compared with Nifty-50’s 17 per cent rise in valuation and 18 per cent CAGR index growth, the mid-cap index reported 88 per cent rise in valuations and 30 per cent CAGR in index. Similarly, the small-cap index has reported 63 per cent rise in valuation and 28 per cent CAGR in index.
In the event of consolidation and reversion to mean, or even a time correction taking place when stock earnings rise to match the current valuations without generating returns, the mid- and small-cap stocks can face a higher impact compared with their large-cap counterparts.
Moreover, the expected recovery in private capex based on better demand and lower cost of finances (based on lower yields) should be led by large-caps with mid- and small-caps facing second-order effects in the follow-on period.
Tough index to beat
One of the large-cap indices – Nifty-50 total returns index, has proved to be a tall order to beat in the large-cap fund universe. There are 25 funds with five or more years of operations in the class. But 12 funds have failed to beat the index on a five-year rolling return basis in the last 10 years. Overall, the large-cap class has beaten the index only 45 per cent of the time and a similar number has a better average five-year rolling return than the index in the last 10 years.
Based on average five-year daily rolling return over the last 10 years, Mirae Asset Large Cap Fund has the highest average of 15.5 per cent. This excludes Mahindra Manulife, which has a shorter operating history. The Mirae Asset Large Cap Fund has also beaten the index 70 per cent of the time in the period, which is better than the class average as seen in the table.
Fund performance
The fund has beaten the index on a daily average of rolling returns basis across one-, three- and five-year timeframes in the last 10 years. But the chances of beating the index with the fund increases substantially when invested over a longer timeframe, as can be seen in the table. While the fund beat the index only half the time in a one-year period, it increases to 70 per cent in a five-year timeframe.
As the name suggests, the fund has 82 per cent exposure to large-caps and 10 per cent/6 per cent exposure to mid- and small-cap stocks in August 2024. The fund has the highest exposure to banks, but that has come down from 29-30 per cent in the last two years to 27 per cent currently, and IT exposure has increased in August 2024 to 13 per cent from 11 per cent in March 2023.
Despite class restriction, the fund is invested into a diversified portfolio of stocks (70 as of August 2024) and top-10 holdings account for only 55 per cent.
Investors looking for safety in the upcoming period of rate cut cycle can look to large-cap funds offer a safer refuge. Mirae fund with better performance in the sector can be invested into, but for a longer timeframe, as with most equity funds.
Why invest
Equity asset-class may look to consolidate
Large-caps have underperformed mid- and small-cap stocks
The fund has beaten the index in all three timeframes
