DSP MF explains why its mid-cap scheme is underperforming the benchmark

DSP Mid Cap Fund has given 50.4% return in the last one year, however, during this period the scheme has underperformed Nifty Midcap 100 Index, the benchmark by 30.14 per cent.

Mid Cap Fund is the fourth largest scheme in this category, giving average returns of 71.87 per cent, 24.94 per cent and 19.63% on one year, three year and 10 year basis respectively.

Explaining what the fund could have done differently, Sambre said, “We avoided some of the best performers in the index because they don’t qualify on our thresholds of balance sheet quality, corporate disclosure and business model sustainability.” “We don’t regret remembering these names. We underestimated the pace of earnings and missed out on midcap IT companies sharply.”

“We were quick to weigh in on specialty chemical companies. There were businesses where it took us longer to convince ourselves of the underlying changes. But we judge these decisions based on the quality of our analysis when we made these decisions, not the results.”

In the note, the fund house also pointed out that DSP Mid Cap Fund delivered three and 10-year returns of over Compound Annual Growth Rate (CAGR) of 22.4% and 18.78% respectively.

In addition, the fund has outperformed the benchmark in eight out of 10 calendar years from 2010 to 2020.

DSP MF said that the alpha over the last three years is positive even after the under-performance in the last one year period (year ending September 2021).

“There is some cyclicity in this number as well. This is driven mostly by market sentiment, cyclicality in the economy and operating environment of businesses, which you do through this fund,” Sambre wrote.

The fund house has heavily weighted some of the underperforming stocks in the past one year. These stocks are Alembic Pharma, City Union Bank, Coromandel International and Manappuram Finance.

The asset management company also pointed out that post the outbreak of Covid-19, the scheme saw a decline of 32.8% as against a fall of 48.2% in its benchmark Nifty Midcap 100 TRI.

DSP Mid Cap Fund has assets under management 14,190 crore till 31 October. The largest fund in the category is HDFC Mid-Cap Opportunities Fund ( 31,629 crore), followed by Kotak Emerging Equity Fund ( 16,485 crores) and Axis Midcap ( 15,988 crore).

The best performing scheme in the category is PGIM India Midcap Opportunities Fund which has given returns of around 95% on a one year basis.