Why is this veteran large & midcap fund losing ground?

Summary: One of India's oldest large & midcap funds has been trailing its peers for years. We examine the two structural factors behind the persistent gap in the fund’s performance and what investors should watch out for.

An underperformance of one or two years may not be cause for concern. But when a fund remains sluggish for years, it warrants a closer look.

That is what has been happening with the Aditya Birla Sun Life Large & Mid Cap Fund. One of the oldest funds in the large & midcap category, it has been trailing its peers and the benchmark (Nifty LargeMidcap 250 TRI) since January 2022. Over this period, the fund delivered average five-year returns of 14 per cent, while the category median and benchmark returned 19.2 per cent and 18.6 per cent, respectively.

Here, we examine the key reasons behind this persistent gap and what investors should watch.

Underperformance, in numbers

Rolling returns offer the fairest way to measure consistency. Instead of measuring performance between two fixed dates, they capture returns across hundreds of overlapping windows, giving a clearer picture of what investors actually earned.

On that measure, the fund beat its benchmark in only 26 per cent of all five-year rolling periods between January 2013 and April 2026. And when it did outperform, the margin was moderate.

As the above table shows, the fund never beat its benchmark by more than 6 per cent in any rolling period. With the category median close to 20 per cent, this is not bad luck; it points to a structural problem within the portfolio.

Two factors highlight most of the performance gap: poor sectoral positioning and inflated valuations.

#1 Poor sectoral positioning

A primary reason for the ABSL Large & Mid Cap Fund’s subdued returns is misplaced sectoral allocations. Here’s how.

Heavy allocation to Consumer Discretionary: Since March 2022, the fund has held Consumer Discretionary stocks at roughly 6 percentage points above the benchmark's weight. This proved costly, since the BSE Consumer Discretionary Goods and Services Index returned just 11 per cent annually over this period.

Underweight in Energy: Since March 2020, the fund maintained an average allocation of around 6 per cent to Energy, even as the Nifty Energy index delivered 23.8 per cent annually. Peers with higher exposure to Energy stocks benefited significantly; this fund did not.

Insufficient allocation to Healthcare: The fund held around 6 per cent in Healthcare since March 2020, while top-quartile peers held over 8 per cent. The sector delivered 22 per cent annually over this period, so even the allocation gap alone cost the fund meaningful returns. But the problem ran deeper. The actual contribution from Healthcare was lower than even a 6 per cent weight would imply, pointing to poor stock selection. Holdings like Natco Pharma, Gland Pharma, Divi's Laboratories and Aurobindo Pharma delivered XIRR returns ranging from negative 2 to negative 33 per cent. The sector offered an opening; the individual picks did not take it.

#2 Inflated valuations

The fund's average price-to-earnings ratio over five years stood at 30, against the benchmark's 27.3 and the top-quartile category median of 23.9. Paying a higher multiple than both the benchmark and the best-performing peers means buying stocks with strong expectations already priced in, leaving little room for error. When sector calls and stock picks go wrong, higher entry valuations amplify the damage.

One development stands apart. Following a fund manager change in October 2024, the fund's average P/E cooled to 29.3, while the benchmark's P/E over the same window was 30.5, and the top-quartile median was 27. The fund is now buying at a discount to the benchmark rather than a premium. Whether this reflects a genuine shift in investment philosophy or simply where markets have moved is too early to say.

The bottom line

Overweight in underperforming sectors, underweight in the strong ones and a habit of paying above-benchmark valuations, these three forces have quietly compounded into a persistent performance gap for ABSL Large & Mid Cap Fund.

A fund manager change has nudged valuations in the right direction, but it is too early to call a turnaround. Investors should watch whether better sectoral positioning and stock selection follow in the quarters ahead.

Deciding whether to stay in a lagging fund or move on is easier with the right data. The Value Research Fund Advisor helps you find funds that are actually earning their place in your portfolio.

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