PGIM India Midcap Opportunities Fund: Focusing on Quality Midcap Stocks

Welcome to  PersonalFN's weekly analysis on diversified equity mutual funds. In this issue, we have analysed PGIM India Midcap Opportunities Fund,  highlighting its performance, peer comparison, investment strategy, fundamentals, portfolio, and suitability.

PGIM India Midcap Opportunities Fund is a well-managed Midcap Fund that has turned out to be one of the top performers in the category. It focuses on identifying quality midcap stocks which can benefit from a favourable economic environment.

Past performance is not an indicator of future returns
Data as on June 12, 2023
(Source: ACE MF)

PGIM India Midcap Opportunities Fund has registered superior performance in the last few years and has managed to generate a healthy alpha over its benchmark Nifty Midcap 150 - TRI Index. The recent outperformance has helped the fund improve its long-term performance as well and has helped it to generate a significant lead over the category average and the benchmark across most time periods. On a longer time periods of 5-years and 7-years, the fund stands among the category toppers. Even though PGIM India Midcap Opportunities Fund has trailed the benchmark and many of its peers in the last one-year period, it has the potential to bounce back with significant gains.

On risk-return parameters, PGIM India Midcap Opportunities Fund has encountered higher volatility (17.96%) when compared to some of its category peers but is still lower than the benchmark. The fund's superior outperformance over the last few years has helped it generate higher risk-adjusted returns for investors. Its Sharpe (0.51) is currently among the highest in the Mid-cap Fund category, thus rewarding investors with superior risk-adjusted returns.

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Investment strategy of PGIM India Midcap Opportunities Fund

PGIM India Midcap Opportunities Fund is a midcap fund that is mandated to invest a minimum 65% of its assets in mid-cap stocks (defined as stocks between 101 to 250 ranked as per market capitalization). The fund follows a combination of the top-down and bottom-up approach to select quality mid-cap stocks across sectors, and gives higher weightage to valuation parameters as well as growth, margins, asset returns, and cash flows, amongst others. While selecting stocks the fund managers look at the current and historical financial condition of the company, potential value creation/unlocking of value and its impact on earnings growth, capital structure, business prospects, policy environment, strength of management, responsiveness to business conditions, product profile, brand equity, market share, competitive edge, research, technological know-how, and corporate governance.

The fund holds top 40%-45% of its portfolio in 'Stable Growth' i.e. companies with stable earnings and strong earnings visibility (of 14-16%); mid 40%-45% of the portfolio is in 'High Growth' stocks i.e. companies with strong earnings growth (of above 20%); and bottom 10%-20% of the portfolio in 'Turnaround' stocks i.e. Turn around stories and good companies going through bad times with significant potential for alpha generation.

PGIM India Midcap Opportunities Fund invests in a well-diversified portfolio of stocks, limiting exposure to single stocks within the 5% mark. Although PGIM India Midcap Opportunities Fund follows a buy and hold investment strategy, it is nimble in its approach and does not hesitate to churn a small portion of its portfolio to capture attractive opportunities in the mid cap segment. In the last 12 months, PGIM India Midcap Opportunities Fund has registered a turnover ratio between 85% to 120%.

As of May 31, 2023, PGIM India Midcap Opportunities Fund held a diversified portfolio of 67 stocks. The top-10 stocks accounted for around 30% of its assets, with names like Jubilant FoodWorks, Cholamandalam Investment & Finance Company, Tube Investments of India, Timken India, and Persistent Systems forming part of its prominent holdings. Max Healthcare Institute, The Phoenix Mills, Cummins India, Navin Flourine International, and Indraprastha, were among other prominent holdings in the fund's portfolio.

PGIM India Midcap Opportunities Fund has gained immensely from its holding in Cholamandalam Investment & Finance Co., Cummins India, SKF India, The Federal Bank, and Coforge that have grown significantly in value since the time the fund added them in the portfolio. Meanwhile, it booked substantial profits in The Indian Hotels Company, Ashok Leyland, Bharat Forge, and ICICI Bank among many others.

PGIM India Midcap Opportunities Fund is benchmark agnostic, and prefers to hold a low overlap of 30%-35% with the benchmark and is overweight on sectors which are currently underbought. In terms of sector holdings, the fund's portfolio is majorly exposed to Finance, Engineering, Auto & Auto Ancillaries, Consumption, Chemicals, and Infotech that collectively account for 58.4% of its assets. The fund's other core sectors include Consumer Durables, Construction, Oil & Gas, Healthcare Services, and Pharma among others.

Suitability

PGIM India Midcap Opportunities Fund is an aggressive growth oriented midcap fund, that focuses on investing in high quality growth stocks of mid-sized companies. The fund is capable of riding the tough market conditions well. The nimble approach followed by the fund managers helps it take advantage of stock and sectorial rotations during positive as well as negative market conditions. The fund takes overweight position on underbought sectors to benefit from the growth potential in temporarily ignored sectors.

As PGIM India Midcap Opportunities Fund is benchmark agnostic and has a low overlap with that of the benchmark, the investments in stocks shortlisted using various parameters are made typically at the conviction of the fund manager, irrespective of their weightage in the index. Certainly, the performance of the fund may deviate significantly from the benchmark. Though the fund may at times struggle to keep pace with the benchmark it can reward investors with reasonable gains over complete market cycles.

PGIM India Midcap Opportunities Fund is suitable for investors with a high risk appetite and an investment horizon of at least 5-7 years.

Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.

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