Even though the DSP Midcap fund has delivered returns of about 40-50 per cent in the last one year, it is currently going through its leanest phase compared with peers, particularly since the last quarter of 2020. The fund trails the category average and the mid-cap index by more than 16 and 19 per cent, respectively. This now also reflects in its long-term performance wherein it is currently trailing the index by about 1 per cent and is ahead of the category average by just a whisker over a five-year horizon. What, according to you, have been the reasons for this underperformance? This is the most pressing question in the minds of all investors of the DSP Midcap fund which we are cognizant of and equally anxious. We would like to give confidence to the investors by saying that our portfolio quality in terms of earnings growth, cash-flow generation, ROCE and management quality is robust and we firmly believe in its ability to provide a satisfactory outcome over the long term. While we are taking some corrective actions which are required to be taken but avoiding too many unwarranted changes to the portfolio under pressure. When we look at the misses which led to this underperformance as compared to the benchmark, there are many companies which we were okay not participating in and for few where we need some corrective action, we are doing that gradually. This underperformance of the last one year needs to be broken down in two phases. Until October last year, we were performing well. Starting October 2020 till April 2021, a significant part of the underperformance occurred, almost about 17 per cent when compared to the benchmark and we lagged peers as well. Four months since then, we have been able to arrest this underperformance to about 2.5 per cent compared to the benchmark. The period from October, 2020 to April, 2021 saw significant and swift changes in terms of the sector rotation based on macro themes, also trade shifted to value and cyclical stocks within which mediocre companies outperformed significantly. Our long-term orientation of looking at companies prevented us from capturing some of these swift sectoral rotation and theme-based investments. Further, due to our clear threshold on key financial metrics and business quality, we avoided a few companies that did not fit our criteria, for e.g. a large diversified conglomerate from the west, one of the large NBFCs in CV finance, among others. Further, there were companies within the mid-cap IT and engineering space which we under-owned that also led to underperformance. This was a miss and we could have owned them more. As a corrective strategy, within this space wherever we are seeing value and believe this could be a secular trend, we are trying to bridge this gap. The other factors resulting in poor performance are from companies we owned that did well up to October 2020 and have subsequently stagnated or consolidated, for e.g. agri-input companies, mid-sized banks, NBFCs, etc. These companies have not lost their value proposition or their ability to grow. Their long-term outlook is good. There is a temporary pause in their long perf
This article was originally published on September 27, 2021.
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