Funds Fail to Keep Pace as Indian Mid-Cap Stocks Rally to Record

  • Consumer, drugmakers drag funds down as demonetization hits
  • Industrials, utilities and commodities stocks power 12.4% gain

Fund managers in India have failed to keep pace with the rally in the country’s medium-sized stocks. 

An index of Indian mid-cap mutual funds returned 8.1 percent in the past six months through Feb. 3, trailing the benchmark Nifty Midcap 50 Index’s 12.4 percent gain in the same period, according to data compiled by Bloomberg. The underperformance was due to money managers being slow to switch out of consumer and pharmaceutical stocks and into the hottest sectors, said Prashasta Seth, chief investment officer at IIFL Asset Management Co.

“Funds got burnt as they ended up in a crowded defensive trade,” Seth, whose firm has $890 million of assets, said by phone. “They weren’t nimble-footed enough to catch the swift rally in momentum plays like resources.”

The Nifty mid-cap gauge, which hit a record high on Monday, has seen its performance over the past six months driven by industrials, utilities and commodities companies, the data show. 

India’s power sector has risen on the hope that Prime Minister Narendra Modi will remove bottlenecks in electricity generation, while industrials advanced as the government vowed to increase public spending in infrastructure projects, according to Nilesh Dedhia, director at NTD Trading Ltd. U.S. President Donald Trump’s pledge to increase infrastructure spending has lifted raw materials globally, adding to the commodities revival last year that was driven by Chinese stimulus efforts.

Fund managers were overweight on shares of consumer and drug makers, the top mid-cap performers over the past five years, according to data compiled by Bloomberg. But those positions were hit by Modi’s demonetization push, said Prateek Agrawal, chief investment officer at Mumbai-based ASK Investment Managers Ltd.

The cash ban of high denomination notes was abruptly announced by Modi and introduced in November to help curtail tax evasion and graft. The policy has led to a widespread slowdown across sectors and the government expects India’s economy to grow at 7.1 percent in the financial year to March 2017, down from the 7.6 percent previously estimated. With 86 percent of notes sucked out of circulation, most economists expect the issue to persist until at least the middle of 2017, by which time most of the paper currency is likely to be replaced.

“I expect consumption-based stocks to catch up with the board market over the next three months,” said Agrawal.

— With assistance by Debjit Chakraborty, Puneet Saxena, Nupur Acharya, and Ravil Shirodkar

    Before it's here, it's on the Bloomberg Terminal.