Sundaram Midcap Fund – Interview with CIO, S KrishnaKumar

I welcome Mr S. KrishnaKumar, CIO of Sundaram Mutual Fund and Fund Manager of Sundaram Midcap Fund. 

Today, we are going to talk to him about Sundaram Midcap Fund, which he has been managing since Nov 2012. 

While the fund was a top rated fund at one point, currently it seems to be a laggard. Investors have been jumping off to other ‘better’ funds. 

However, in my view, it is important to understand the journey and the context and for this we are asking some important questions to the fund manager, Mr Krishnakumar himself. 

Welcome Mr KrishnaKumar. Let’s get started.

VK: Sundaram Midcap is one of the veterans in the midcap offerings of the MF industry. 

The first thing I ever noticed about the scheme has that since inception it has a mandate to avoid investing in the top 50 stocks. 

Further, in 2018, there was a redefined list from SEBI about which stocks can a Midcap fund target. In terms of market cap ranking, it is 101st to 250th stock.  

In 2021, where does Sundaram Midcap Fund actually invest in?

KK: We are investing about 75-80% in the midcap space, 10-15% in smallcaps and the rest in large caps ( since our benchmark has an exposure here).

The objective of the fund is to invest in tomorrow’s large caps, which is essentially about identifying the right growth stocks through our research process, buying and holding them through their growth journey. This provides us with an opportunity to benefit from the earnings growth and the subsequent valuation re-rating too.

Stocks like Bajaj Finance, Honeywell, Tata Consumer, MRF etc. have been small and midcaps that have or on their way to being a top 100 company. 

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VK: Apart from size, what kind of stocks does the scheme avoid investing in? What are the key parameters you will not compromise on?

KK: We look at stocks form a 5S approach wherein we filter companies based on simplicity of business models, visibility of long-term growth, sound management / promoter, right capital allocation, sustainable competitive advantages and strong operating cash flows. Along with this we use a Growth At a Reasonable Price (GARP) valuation methodology to buy stocks.

Management pedigree and competitive advantages are something more important amongst the above.

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VK: What has changed for the fund post COVID? Has there been any change in strategy? 

KK: We had to be more reactive to the events and trends that unfolded as it a once in a lifetime event – the covid pandemic. Higher than normal cash levels, reducing exposure to businesses that were impacted to lock down for a longer period of time ( e.g., multiplexes) was the strategy but as I mentioned, the portfolio did see changes as the economy opened up. Otherwise there has been no significant change in strategy.

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Q4: With the Budget 2021 proposals, do you see many opportunities emerging for mid cap stocks? Will Sundaram Midcap fund positioning be able to benefit from this or will it need further changes in the portfolio? 

A4: Key takeaways from the budget were the clear shift in focus on increasing capital spend to drive the growth in the economy while weaning away from subsidies. The confidence to go for a higher than normal borrowing for spending on projects is a visible  change from the over reliance on monetary policy earlier in the year.

The fiscal policies that have been outlined earlier and in the budget gives us a lot of confidence on the start of a new investment cycle in India. The intent of the Govt. to push PSU bank recap, ARC / AIF for troubled assets, asset monetisation and strategic PSU divestment all point to removing capital constraints for growth. This has significant implications for our portfolios as domestic growth oriented sectors – banking, NBFCs, cement, infra construction and industrials – will be interesting businesses to be invested in.

The Govt. has pulled up growth in the housing sector through various initiatives seen earlier and setting right the household investment rate. The consumption engine has been reasonably strong over the last many years and with the concurrent resumption of the investment cycle, the Indian GDP growth can settle back into a medium term CAGR of 7%.

Our midcap portfolio is fairly diversified given the balanced growth expected in the next few years 

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Q5: The last few years have been difficult for the scheme. 

While the Midcap space was in trouble over the last 3 to 5 years, Sundaram Midcap has been a laggard. It has consistently underperformed BSE Midcap 150 TRI over 1, 3, 5 and 7 years. Is this because there been wrong calls made or the fund is playing contrarian? What is the reason here? 

A5: Clearly, some of the calls made have not worked like higher exposure to consumer cyclicals, industrials and financials during the slowdown in FY19 & FY20. The covid impact also didn’t help the high touch sectors like services too. The pro growth positioning was based on the expectations of sustainable 7-8% GDP growth which didn’t happen as expected.

The Sebi regulation on scheme reclassification  in March’18 was another factor that created a sell down in midcaps from diversified schemes. Midcaps being relatively illiquid, and more so during a slowdown, the strategy was to moderately alter the portfolio without much impact costs.

More importantly, the fund has been true to its mandate with limited exposure to the large cap segment which has been a significant outperformer from CY18-19. 

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Read more: Why is Sundaram Midcap Fund such as laggard?

Q6: Would you say that the last few years were outliers for the scheme? Or, this was very much a part of the expected journey for a scheme and strategy like this?

A6: While every fund goes through its bit of cyclicality in performance based on its style, a midcap / smallcap scheme experiences a relatively higher volatility. Efforts have been taken to moderate the volatility and optimise the risk return balance.

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Q7: One of the other cribs about the fund (apart from the returns) has been its expense ratio, which currently at 1.14% (latest) and in the past as well has been the highest amongst the peers. Your response to that? 

A7: The expense ratios (TERs) are regulated by the SEBI and we follow the guidelines.

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Q8: In the current context, would you welcome large lumpsum investments in the scheme or you believe that regular investing over a period of time will make more sense? 

A8: While regular investing helps, bulk investments during periods of economic stress / market panic are always well rewarded. Given the recovery in the economy and markets, I believe regular investing will help now. 

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Q9: How are fund managers personally invested in the midcap scheme? Does the cook eat its own cooking?    

A9: I have a substantial portion of my equity investments in the midcap fund and other Sundaram funds.

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Q10: Finally, the big one. There has been an announcement that Sundaram MF is acquiring Principal MF. Now, we know that the latter also has a midcap scheme. Once the merger is done, the AMC cannot have 2 midcap schemes. Which one of the 2 strategies will prevail going forward? 

A10: The acquisition and mergers are subject to regulatory approvals and still some time away. All decisions will be taken keeping the investors interest in mind.

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Thank you for your time and the answers, Mr KrishnaKumar. I am sure this puts the fund in a clearer context for the investors. 

Click here to read the latest factsheet of Sundaram Midcap Fund.