Motilal Oswal Asset Management Company Ltd. (MOAMC) is a public limited company incorporated under the Companies Act, 1956 on November 14, 2008, having its Registered Office at 10th Floor, Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai - 400025.
Motilal Oswal Asset Management Company Ltd. has been appointed as the Investment Manager to Motilal Oswal Mutual Fund by the Trustee vide Investment Management Agreement (IMA) dated May 21, 2009, executed between Motilal Oswal Trustee Company Ltd. and Motilal Oswal Asset Management Company Ltd.
Motilal Oswal Dynamic Fund (Div-A) - 12.7035Motilal Oswal Dynamic Fund (Div-Q) - 11.8996Motilal Oswal Dynamic Fund (G) - 13.505Motilal Oswal Dynamic Fund-Dir (Div-A) - 12.97Motilal Oswal Dynamic Fund-Dir (Div-Q) - 11.8768Motilal Oswal Dynamic Fund-Dir (G) - 14.1285Motilal Oswal Equity Hybrid Fund - Direct (G) - 11.9372Motilal Oswal Equity Hybrid Fund - Regular (G) - 11.5569Motilal Oswal Focused 25 Fund - Direct (D) - 17.65Motilal Oswal Focused 25 Fund - Direct (G) - 25.711Motilal Oswal Focused 25 Fund (D) - 16.0335Motilal Oswal Focused 25 Fund (G) - 23.269Motilal Oswal Large and Midcap Fund - Dir (D) - 10.0223Motilal Oswal Large and Midcap Fund - Dir (G) - 10.0223Motilal Oswal Large and Midcap Fund (D) - 9.8599Motilal Oswal Large and Midcap Fund (G) - 9.8598Motilal Oswal Liquid Fund - Direct (Div-D) RI - 10.0077Motilal Oswal Liquid Fund - Direct (Div-F) RI - 10.0103Motilal Oswal Liquid Fund - Direct (Div-M) - 10.0467Motilal Oswal Liquid Fund - Direct (Div-Q) - 10.0723Motilal Oswal Liquid Fund - Direct (Div-W) RI - 10.0058Motilal Oswal Liquid Fund - Direct (G) - 10.8653Motilal Oswal Liquid Fund - Regular (Div-D) RI - 10.0055Motilal Oswal Liquid Fund - Regular (Div-F) RI - 10.0099Motilal Oswal Liquid Fund - Regular (Div-M) - 10.0458Motilal Oswal Liquid Fund - Regular (Div-Q) - 10.0659Motilal Oswal Liquid Fund - Regular (Div-W) RI - 10.013Motilal Oswal Liquid Fund - Regular (G) - 10.8369Motilal Oswal Long Term Equity Fund (D) - 14.7226Motilal Oswal Long Term Equity Fund (G) - 16.6155Motilal Oswal Long Term Equity Fund -Dir (D) - 15.9764Motilal Oswal Long Term Equity Fund -Dir (G) - 17.9368Motilal Oswal Midcap 30 Fund (D) - 18.0848Motilal Oswal Midcap 30 Fund (G) - 25.3152Motilal Oswal Midcap 30 Fund-Dir (D) - 18.5695Motilal Oswal Midcap 30 Fund-Dir (G) - 27.4504Motilal Oswal Multi Asset Fund - Direct (G) - 10.0283Motilal Oswal Multi Asset Fund (G) - 10.0092Motilal Oswal Multicap 35 Fund (D) - 22.6025Motilal Oswal Multicap 35 Fund (G) - 25.6552Motilal Oswal Multicap 35 Fund-Dir(D) - 22.682Motilal Oswal Multicap 35 Fund-Dir(G) - 27.2712Motilal Oswal Nasdaq 100 FOF - Direct (G) - 17.3321Motilal Oswal Nasdaq 100 FOF - Regular (G) - 17.2074Motilal Oswal Nifty 50 Index Fund - Direct (G) - 9.4927Motilal Oswal Nifty 50 Index Fund (G) - 9.4645Motilal Oswal Nifty 500 Fund - Direct (G) - 10.7682Motilal Oswal Nifty 500 Fund (G) - 10.696Motilal Oswal Nifty Bank Index Fund - Direct (G) - 8.0443Motilal Oswal Nifty Bank Index Fund (G) - 7.9908Motilal Oswal Nifty Midcap 150 Index Fund (G) - 11.7852Motilal Oswal Nifty Midcap 150 Index Fund-Dir (G) - 11.8647Motilal Oswal Nifty Next 50 Index Fund - Dir (G) - 9.7557Motilal Oswal Nifty Next 50 Index Fund (G) - 9.7091Motilal Oswal Nifty Smallcap 250 Index Fund (G) - 11.4687Motilal Oswal Nifty Smallcap 250 Index Fund-Dir(G) - 11.5465Motilal Oswal S&P 500 Index Fund - Direct (G) - 11.1872Motilal Oswal S&P 500 Index Fund (G) - 11.1563Motilal Oswal Ultra Short Term Fund - Dir (Div-D) - 9.676Motilal Oswal Ultra Short Term Fund - Dir (Div-F) - 9.6941Motilal Oswal Ultra Short Term Fund - Dir (Div-M) - 9.6829Motilal Oswal Ultra Short Term Fund - Dir (Div-Q) - 9.8221Motilal Oswal Ultra Short Term Fund - Dir (Div-W) - 9.6867Motilal Oswal Ultra Short Term Fund - Dir (G) - 13.7101Motilal Oswal Ultra Short Term Fund (Div-D) - 9.6795Motilal Oswal Ultra Short Term Fund (Div-F) - 9.6898Motilal Oswal Ultra Short Term Fund (Div-M) - 9.68Motilal Oswal Ultra Short Term Fund (Div-Q) - 9.8207Motilal Oswal Ultra Short Term Fund (Div-W) - 9.6829Motilal Oswal Ultra Short Term Fund (G) - 13.3319

Wealth creation in Midcaps

Blog Blog Details
  • December 16, 2019
  • Aashish Somaiyaa|
  • MD & CEO
Dear Investors and my dear advisor friends,

The most common refrain I have heard in the last two years is, “Markets are at all-time high” and my portfolio is nowhere close” or “Markets are at all-time high and my portfolio is negative”. This depends on what you call as “market”. Usually most people form their impression of what is happening in the “market” by seeing what is happening in Nifty or Sensex. Up until 2018 usually the correlation of Sensex and Nifty with the broader market was not a concern because either everything moved in tandem or the midcaps and smallcaps actually did better than Sensex or Nifty. But since January 2018, the correlation between Nifty and the rest is broken. The below charts, one for the last 5 years and one since January 2018 respectively will illustrate pictorially what I am stating here.

Source: Motilal Oswal Asset Management Internal Analysis

Over a longer period of 5 years not only did the Nifty move in tandem with the midcap and small cap indices, infact the midcap and smallcaps outperformed Nifty very significantly.

But since 2018, the rise of Nifty alone and the slump in midcap and smallcap indices has been a cause of great concern for investors.

Despite this experience, over the last nearly 2 decades of investing experience, we at Motilal Oswal AMC are strong believers in creating wealth by picking midcap stocks and holding them over a number of years. Let me explain why.

The picture below has 3 grids. The “x” axis has “FROM” and the “y” axis has “TO”. Each grid tells you that at the beginning of a 5 year period if you had started by buying the entire bouquet of small, mid and large cap companies and held them for the 5 years dispassionately, what kind of market cap migration (wealth creation / destruction) you would see. 

The most potential migrations are related to midcap companies defined here as stocks from market cap ranking 101 till 300. While the recent regulatory definition last year calls rank 101 to 250 as midcap, we at Motilal Oswal AMC have been publishing these grids in every Wealth Creation Study published by our Chairman over the years. Anyway it is not so much about where the definitions and the ranks are cut at, because market capitalization ranks are a continuum and there is not much size difference between rank 250 and say 251 or 260. As per current numbers, roughly the top 100 companies (largecap) start at 10 lac crs and end at approx. 30,000 and from thereon till say 6,000 crs (300th rank) is midcap as per the below analysis. Everything from 6000 crs below is small (mini)cap. Small (mini)cap shows a huge number of companies and within that too one can cut-off at say 4,000 crs (400th rank) and still pick stocks applying filters for sector leadership, brands, RoEs, EPS growth, leverage ratios, cyclicality of business etc.

Coming back to the midcap discussion, take the grid on the extreme right for example. What one can see is that in the 5 years’ time frame out of 200 midcap companies 88 companies degenerated to becoming smallcap and delivered a negative CAGR of 19%. On the other hand 88 companies remained midcap and delivered 9% CAGR and 24 companies actually migrated upwards to becoming large cap and delivered average 33% CAGR. So about 50% odd midcap companies remained midcap or migrated to large cap and gave positive compounding. If you follow the same midcap migration column in the other grids you will find that for the period 2005-10 and 200-05 also, around 50% of the midcap companies remained midcap or migrated to becoming large cap. As per analysis done by us, this probability of success in the midcap universe holds true across any 5 year time frame. Now, let me capture a few learnings from these tables:

Source: Mid to Mega – 20th Wealth Creation Study by Raamdeo Agarwal

1. For any given 5 year period, maximum wealth is created when a small cap company becomes mid/ large cap and a mid-cap company becomes a large cap

2. If one invests in midcaps, the probability that a midcap will remain or become large cap in 5 years and rewards investors, is as high as ~50%

3. In any 5 year cycle when this plays out, there are 2-3 terrible years and 2-3 great years. 2000-2003 were very bad followed by 2004-05, 2005-07 were great followed by 2008-09, 2010-13 were terrible followed by 2014-15

4. Rather than getting stuck with definitions of small or midcap, one must look to understand probabilities and improve probabilities of success as a stock picker by applying appropriate quality (Q), growth (G) and longevity (L) filters. Since market cap ranks are a continuum and not distinct strata of companies, smallcaps as per above grid should still be invested into but by isolating the really small ones say below Rs 3,000 crs or Rs 4,000 crs (approx. 400-500th rank) and then applying fundamental filters. 

5. It is estimated that if an investor invests for 5 years in midcaps and the higher market cap ranges of small caps they can make outsized returns irrespective of the journey in between; much like the quality of a seed can’t be concluded upon until it is allowed to sprout. All the same, if one keeps digging to see the progress on a daily basis one can rest assured there will be no plant at the end of the process.

6. Stock picking is probabilistic in nature especially when dealing with smallcaps and midcaps but probabilities of picking right stocks are greatly enhanced when professionals apply certain filters on quality and growth orientation and corroborate via research processes. This is why philosophy and process are important to focus on what might work and weed out the obvious tripping points.

Hence, please do not worry about how your experience of investing in midcaps / smallcaps has been in the past 2-3 years. A 5 years’ time frame is good enough for one to make good returns. If the first 2-3 years are great the rest of the period may be rocky and if the first 2-3 years are rocky the balance period tends to make up. It is worth thinking what the opportunity is for anyone who chooses to initiate investment in small and midcaps at this point in time. Let us not drive with eyes on the rear-view mirror! It’s the large cap part of the market which is at highs, but the midcaps have corrected severely and all of them do not have fundamental performance issues. These are unusual times and we must take benefit of the same because capturing opportunity is what investing is about. What worked in the last 2 years was an opportunity 2 years back, what will work in future is the opportunity now and that is in midcap and quality small caps. 

Those who invested 5 years back have made a reasonable returns despite last 2 years not being great, those who have invested two years back have a very high probability of seeing a good patch of next 2-3 years. Please do not get caught up in oversimplified arithmetic like, “if 100 has become 80 after two years how much does it need to go up for me to make great returns”. Equity is not a linear asset class and returns never flow as per simple arithmetical calculations. A non-linear / geometric / exponential asset class always moves something like what you will see below:

1.Mid and Small caps tend to perform in extremes and revive sharply after bouts of negative returns

2.After the correction in the last 2 years, a significant revival in performance is a high probability event in next 2-3 years.

3.It has never happened that there are successive years of decline.

Having noted this pocket of opportunity that has been created, see where mutual funds, insurance companies and other financial institutions are consistently piling investors’ monies into. PMS portfolios have the distinct ability not to get straight-jacketed into definitions of midcaps and large caps which I like drawing a line in the sand but anathema to capitalizing on investment opportunities.

Source: Economic Times dated December 5, 2019.

We have mid and small cap exposure across NTDOP, IOP and IOP2. NTDOP is about 50% midcap and IOP portfolios are almost entirely mid and small cap. We have seen significant outperformance over index in 2016-2017, we have seen a fall in values in line with index in 2018 and we have seen a huge outperformance over corresponding index post the market bottom in October 2018. This is not to say that one must draw solace or that we draw solace in beating the index; we are here to create wealth for our investors and for our own investments alongside our investors. 

But the first sign that we have something working for us is when we see that we are clearly breaking away from the rest of the market.

In closing, I would humbly urge, remain invested and don’t dig to see the progress of the seed. And if you believe in being an astute investor who picks opportunities and doesn’t indulge in rear-view mirror driving, you may invest further in your mid and small cap portfolios.

Lastly, many investors and commentators are worried about prospects of economic growth. In my understanding these are times when one has to think away from the crowd and counter-cyclically. Legendary investor Howard Marks in his latest book has an interesting quote: “When economic growth is slow or negative and markets are weak, most people worry about the losing money and disregard the risk of missing opportunities.”

Yours Sincerely,

Aashish P. Somaiyaa

(MD & CEO – Motilal Oswal AMC)

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