BoI MF is launching its Midcap Fund amidst concerns on midcap valuations being high. Alok says that while valuations look optically higher than large caps, large cap valuations are lower on account of few low PE index heavyweights, which few investors and fund managers want to own anyway.
Valuation gap between large and midcaps becomes much smaller when you calculate on equally weighted basis for both indices.
We have to accept that our market valuations are high, but may likely remain so. Our market offers the second best RoEs – next only to the US – and we are growing a lot faster. High growth – high RoE does attract premium valuations.
Markets’ concerns on earnings growth are legitimate –there is only so much that can be achieved by margin expansion – which has already happened. From hereon, we need to see broad based topline growth led by increasing demand. Management commentaries will be keenly tracked to discern early signs of trend changes.
Tax breaks, lower interest rates, welfare measures, good monsoons – all augur well for higher demand from second half of FY26.
The new BoI Midcap Fund will likely have around 50stocks, with the top 20 accounting for half the portfolio. Expect portfolio turnover around 0.5-0.6 on a steady state basis.
Mid and small caps have seen a big shake out over the last 6-9 months and Alok believes an opportunity to construct a brand new midcap portfolio post shake-out – without any baggage from the past – will help this fund create an edge for itself going forward.