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Citrus Analysis: BNP Paribas Mid-cap: Rising Star
Tue, Oct 23, 2012
Source : Jeni Shukla, Citrus Interactive

BNP Paribas Mid-cap Fund is a mid- and small- cap fund. Currently it has assets under management worth Rs. 29.54 crores. The fund was launched on May 2, 2006 as ABN AMRO Future Leaders Fund and is benchmarked against the CNX Mid-cap Index.

Fund Performance

 

YTD

1-YEAR

3-YEAR

5-YEAR

SINCE INCEPTION

BNP Paribas Mid-cap Fund

37.76

18.44

15.72

-1.94

1.71

CNX Mid-cap

28.28

10.26

5.85

2.68

6.64

Out/Under Performance

 

9.48

 

8.18

 

9.87

 

-4.62

 

-4.93

All figures are in %, as on September 30, 2012

The fund has beaten its benchmark by a reasonable margin year-to-date (YTD), and over the one-year and three-year periods. However, its performance over the five-year horizon and since inception is lower than its benchmark.

 

2011

2010

2009

2008

2007

BNP Paribas Mid-cap Fund

 

-20.76

 

24.71

 

86.35

 

-72.78

 

47.59

CNX Mid-cap

-30.99

19.16

94.85

-60.23

76.93

Out/Under Performance

10.23

5.55

-8.5

-12.55

-29.34

All figures are in %

The calendar year returns suggest that the fund outperformed vis-à-vis its benchmark in the last two consecutive calendar years. In 2011, a bad year for markets, the fund fell less than the benchmark index. However, it underperformed vis-à-vis its benchmark in 2007, 2008 and 2009. The underperformance was considerable in 2007 when it lagged by 29.34 per cent. However, going by the pattern of the fund’s performance relative to its benchmark in the last five calendar years we find a clear trend of improvement in year-on-year relative performance. Each year the fund has done better than the previous calendar year in terms of the difference between fund return and benchmark return.

Rolling returns as well as calendar-year returns suggest that the fund has made a comeback in the last three years. According to Shreyash Devalkar, this fund’s manager, “Our focus on companies which have a quality business model and able management has helped us outperform through varied economic cycles. The outperformance is not on account of just a few investments, but is rather based on contribution from several companies as part of a well diversified portfolio.”

Investment Philosophy and Approach

According to the Scheme Information Document (SID), the scheme objective is to seek to generate long-term capital appreciation by investing primarily in companies with high growth opportunities in the middle and small capitalization segment, defined as ‘Future Leaders’. The fund will emphasize on companies that appear to offer opportunities for long-term growth and will be inclined towards companies that are driven by dynamic style of management and entrepreneurial flair.

Says the fund manager: “As a philosophy, we believe that ‘it is companies that create wealth, not markets’. Thus our approach is to invest in companies which have quality businesses, able management and are available at reasonable valuation. Further in our mid-cap fund, the companies we look for are either leaders in emerging sectors or consolidators/challengers in a large sector. We adopt a bottom up approach for selection of companies for this fund, which has resulted in a well diversified portfolio across sectors. We are inclined towards companies with high sustainable growth that are available at reasonable valuations.”

Portfolio Characteristics

Number of equity holdings. The fund currently has 49 stocks in its portfolio which is higher than the category median of 40 stocks. The average equity count in the last five years for the fund has been 43 stocks. The stock count was at an all-time low of 25 in November 2008 when the global economic crisis started and gradually reached an all-time high of 72 stocks in August 2009. In financial year 2009-2010 the fund maintained a high stock count averaging 61.

Sector Concentration. The fund’s concentration in the top three, five and ten sectors is lower than the category median.

 

Top 3

Top 5

Top 10

BNP Paribas Mid-cap Fund

35.25

51.26

78.42

Category Median

49.3

66.85

81.12

All figures in %

Company Concentration. According to its latest disclosures, the fund’s level of concentration in the top three, five and ten companies is higher than the category median. In the last one year the concentration in the top three, five and ten companies has averaged at 21.1 per cent, 30.18 per cent and 47.02 per cent respectively. Since December 2011 the fund seems to be running a more concentrated portfolio.

 

Top 3

Top 5

Top 10

BNP Paribas Mid-

cap Fund

23.07

32.52

49.44

Category Median

19.46

29.04

47.96

All figures in %

Turnover Ratio. According to the latest portfolio disclosure the fund’s turnover ratio of the fund is 117 per cent. This is much higher than the category median of 72 per cent. The average turnover ratio for the fund has been 111 per cent in the last four years. The fund maintained a very high average turnover ratio of 163 per cent in 2008, which reduced to an average of 136 per cent in 2009. It further went down to an average of 75 per cent in 2010 which it maintained for the greater portion of 2011 (till October). Since November 2011 the turnover ratio has increased again. Says Shreyash: “Market volatility of last year threw open various investment opportunities, hence the higher churn.”

Expense Ratio. The expense ratio of the fund is 2.5 which is higher than the category median of 2.35.

Risk. Going by risk measures such as standard deviation and beta (measured over the last three years) the fund has a lower risk level than the median for the equity diversified category.

 

Standard Deviation

Beta

BNP Paribas Mid-Cap Fund(G)

0.9645

0.6854

Category Median

1.0039

0.8048

 

Risk-adjusted Returns. In terms of measures such as Treynor ratio and Sharpe ratio (also measured over the last three years) the fund has a higher risk-adjusted return than the median for the equity diversified category.

 

Treynor

Sharpe

BNP Paribas Mid-Cap Fund(G)

0.0707

0.0543

Category Median

0.0248

0.0232

 

Cash Allocation. The fund has in the last three years maintained an average cash allocation of 4.62 per cent. In the last three years the highest the fund has allocated to cash is 11.93 per cent in April 2011. Its highest cash allocation in its history has been 22.64 per cent in November 2008 (during the sub-prime crisis). On the cash allocation calls the fund managers says: “We generally do not take an active view on cash levels. We book profit whenever we believe prospects for capital appreciation for a stock are deteriorating or company is overvalued. As such we remain in cash till the time we get our next best idea.”

Portfolio Strategy

2011. In 2011 the markets declined: the Sensex fell -24.83 per cent, the CNX Mid-cap Index fell -30.99 per cent, and the BSE Small-cap Index fell -43.63 per cent.

 Sector Name

Jan 2011 (%)

Dec 2011 (%)

Raised/Lowered Allocation (%age points)

Consumer Non Durables

6.93

14.17

7.24

Cement

0.49

6.72

6.23

Fertilisers

0.00

4.91

4.91

Engineering Services

1.32

4.59

3.28

Auto Ancillaries

6.59

8.89

2.30

Gas

3.24

4.66

1.42

Pharmaceuticals

8.96

10.04

1.08

Banks

13.41

9.87

-3.54

Power

6.91

2.89

-4.01

Industrial Products

4.37

0.00

-4.37

Software

6.95

2.02

-4.93

Media & Entertainment

11.03

2.21

-8.83

During the year the fund raised its allocation to sectors such as consumer non-durables (FMCG), cement, fertilisers, engineering services, auto ancillaries and gas. It lowered its allocation to media & entertainment, software, industrial products, power and banks.

Fund Vs Index – December 2011

Sector Name

Fund %

CNX MID-CAP %

Fund's Overweight/Underweight %age points

Auto Ancillaries

8.89

2.97

5.92

Engineering Services

4.59

0.55

4.04

Cement

6.72

3.97

2.75

Fertilisers

4.91

2.34

2.57

Gas

4.66

3.02

1.64

Transportation

2.25

1.22

1.03

Telecom - Services

1.02

0.00

1.02

Textile Products

1.02

0.00

1.02

Pharmaceuticals

10.04

11.48

-1.44

Power

2.90

4.51

-1.61

Industrial Capital Goods

2.18

4.39

-2.21

Software

2.02

4.56

-2.54

Banks

9.87

13.36

-3.49

Finance

2.71

6.83

-4.12

 

By December 2011 the fund was overweight compared to its benchmark index on sectors like auto ancillaries, engineering services, cement, fertilisers, gas, transportation, telecom and textile products. It was underweight in comparison to the benchmark on sectors like pharmaceuticals, power, industrial capital goods, software, banks and finance.

Company

 Holding Jan-11 %

Holding Dec-11 %

Raised/Lowered Exposure %age points

Indraprastha Gas Ltd.

3.10

4.66

1.57

Castrol India Ltd.

2.48

3.10

0.63

Sundram Fasteners Ltd.

2.62

2.69

0.07

Sadbhav Engineering Ltd.

3.03

3.01

-0.01

Exide Industries Ltd.

2.18

1.56

-0.61

Gujarat Industries Power Company Ltd.

3.60

2.90

-0.71

Lupin Ltd.

3.26

2.41

-0.85

South Indian Bank Ltd.

2.99

2.00

-0.99

Wyeth Ltd.

2.62

1.54

-1.08

ING Vysya Bank Ltd.

3.32

2.16

-1.15

Federal Bank Ltd.

3.45

2.01

-1.44

Chennai Petroleum Corporation Ltd.

2.55

0.97

-1.58

Cummins India Ltd.

2.97

 

-2.97

Entertainment Network (India) Ltd.

5.44

1.23

-4.20

NIIT Ltd.

4.33

 

-4.33

Titan Industries Ltd.

5.38

0.99

-4.39

Dish T V India Ltd.

5.60

0.97

-4.62

Action Construction Equipment Ltd.

6.44

 

-6.44

 

During 2011 among its top holdings, the fund raised its exposure to Indraprastha Gas, Castrol and Sundaram Fasteners. It reduced its allocation to Action Construction Equipment, Dish TV, Titan, NIIT, Entertainment Network, Cummins, Chennai Petroleum Corporation, Federal  Bank, ING Vysya Bank, Wyeth, South Indian Bank, Lupin, Gujarat Industries Power Company, Exide and Sadbhav Engineering.

2012. Year-to-date (as on September 30) CNX Mid-cap is up 28.28 per cent. The best performing sectors are BSE Bankex (43.54 per cent), CNX Media (39.99 per cent), BSE FMCG (36.48 per cent), BSE Capital Goods (35.82 per cent), BSE Realty (34.26 per cent) and BSE Consumer Durables (31.33 per cent).

 

Sector Name

Jan 2012 (%)

Sep 2012 (%)

Raised/lowered allocation (%age points)

Banks

8.36

14.55

6.19

Textiles - Cotton

 

2.88

2.88

Industrial Products

 

2.17

2.17

Cement

6.28

8.04

1.76

Textile Products

1.07

2.79

1.72

Software

2.97

4.23

1.26

Industrial Capital Goods

2.03

3.07

1.04

Engineering Services

4.95

3.67

-1.28

Gas

2.87

1.50

-1.37

Transportation

3.43

1.85

-1.58

Petroleum Products

4.23

2.07

-2.16

Pesticides

2.41

 

-2.41

Media & Entertainment

6.19

3.37

-2.82

Consumer Non Durables

13.88

10.15

-3.73

 

This year the fund has increased its allocation to banks, textiles-cotton, industrial products, cement, textile products software and capital goods and it has reduced its allocation to engineering, gas, transportation, petroleum products, pesticides, media and entertainment and consumer non-durables.

Sector Name

Fund %

CNX Mid-cap %

Fund's Overweight/Underweight %age points

Cement

8.04

3.94

4.10

Auto Ancillaries

6.53

2.95

3.58

Engineering Services

3.67

0.54

3.13

Fertilisers

5.28

2.36

2.92

Construction

5.33

3.14

2.19

Media & Entertainment

3.37

2.11

1.26

Banks

14.55

13.31

1.24

Petroleum Products

2.07

3.27

-1.20

Industrial Capital Goods

3.07

4.41

-1.34

Industrial Products

2.17

3.59

-1.42

Power

2.08

4.45

-2.37

Pharmaceuticals

8.01

11.49

-3.48

Finance

3.29

6.80

-3.51

Consumer Non Durables

10.15

14.37

-4.22

 

As on 30th September this year, the fund is overweight vis-à-vis its benchmark on cement, auto ancillaries, engineering, fertilisers and so on (as mentioned in the table above). It is underweight in comparison to its benchmark on consumer non durables, finance, pharmaceuticals and so on.

The fund manager shares his view on sectors the fund is overweight on: “As mentioned earlier the fund is not really benchmarked, the selection of companies is based on bottom up ideas. The banks and NBFCs we own have good liability franchisee and good quality retail/SME loan portfolio, we see a secular growth in these banks/NBFCs. In addition these are expected to be beneficiary of likely decline in interest rate.  With demonstration of strong pricing power in favorable incremental demand supply scenario, we expect rerating of mid cap cement companies having volume growth prospects. The auto ancillary sector in our portfolio is expected to benefit from rupee depreciation and turn around in overseas operations. Growth in non-urea fertilisers is expected to return after weak years, the companies having access to key raw material are expected to benefit. The Engineering services sector in our portfolio is expected to benefit from opportunities thrown open on scarcity of water, due to its strength in water treatment technology.”

 

Company

% Holding Jan-12

% Holding Sep-12

Raised/Lowered Exposure %age points

IndusInd Bank Ltd.

2.97

5.15

2.18

Balkrishna Industries Ltd.

2.15

3.77

1.62

Federal Bank Ltd.

2.13

2.97

0.84

Shriram City Union Finance Ltd.

2.72

3.29

0.57

DiviS Laboratories Ltd.

2.18

2.57

0.39

VA Tech Wabag Ltd.

3.26

3.59

0.33

Bharat Electronics Ltd.

2.03

1.49

-0.54

Ipca Laboratories Ltd.

2.99

2.22

-0.77

Lupin Ltd.

2.29

1.21

-1.08

Idea Cellular Ltd.

2.72

1.62

-1.10

Castrol India Ltd.

3.28

2.07

-1.21

Gujarat Industries Power Company Ltd.

2.88

1.00

-1.88

United Phosphorus Ltd.

2.41

 

-2.41

Muthoot Finance Ltd

2.68

 

-2.68

Dish T V India Ltd.

2.77

 

-2.77

EID-Parry (India) Ltd.

2.84

 

-2.84

Indraprastha Gas Ltd.

2.87

 

-2.87

Jet Airways (India) Ltd.

3.43

 

-3.43

Jubilant FoodWorks Ltd.

4.20

 

-4.20

 

So far this year (till September 30), among its top holdings the fund has increased its allocation to IndusInd Bank, Balkrishna Industries, Federal Bank and so on (see table above). It has lowered its exposure in Jubilant FoodWorks, Jet Airways, Indraprastha Gas and so on. In seven stocks (mentioned above) the fund has brought down the exposure to nil.

Fund Manager. The fund has seen many changes at the helm. In June 2008 K. C. Reddy took charge of the fund (which was then ‘ABN AMRO Future Leaders’). Within five months the fund manager was Sameer Narayan (the fund was then called ‘Fortis Future Leaders’). In October 2009, Amit Nigam took charge as the fund manager.

The current fund manager, Shreyash Devalkar took charge of the fund in October 2011. He is an engineer from UDCT, Mumbai with a post graduate degree in management from the JBIMS, Mumbai University. He has over five years of experience in equity markets. He has earlier worked with IDFC Capital as an Equity Research analyst and then with JP Morgan Services India and Calyon Bank as a credit analyst.

Shreyash also manages other equity funds from BNP Paribas like BNP Paribas Equity, BNP Paribas Tax Advantage Plan and BNP Paribas Dividend Yield Fund. In addition to this he manages BNP Paribas Monthly Income Plan.

Conclusion

Although the fund may seem to lag in terms of its returns since its inception one cannot overlook the fact that the fund has emerged as a rising star in the last three years. Its continues its strong performance this calendar year, making it to the list of top five equity diversified list in terms of year-to-date returns. For an investor who is looking for a mid-and small-cap fund here is a fund that has emerged as a rising star.

 
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