Recent entrant in mutual fund space WhiteOak Capital Mutual Fund has launched a new fund offer (NFO).
The WhiteOak Capital Large Cap Fund’s NFO will be open for subscription till November 24, 2022. It is an open-ended equity scheme investing predominantly in large-cap stocks (i.e. the top 100 as per market capitalisation). Nearly 80 per cent of the allocation will be towards large-caps and the fund will be benchmarked against the BSE 100 TRI.
Given that a majority of existing actively managed large-cap equity funds struggle to beat their respective benchmarks, will WhiteOak Capital Large Cap carve out a niche for itself?
Why large-caps
The top-100 companies have m-cap of at least ₹47,000 crore. However, the gap between the largest large-cap (₹17 lakh crore) and smallest large-cap (₹47,000 crore) is huge. Yet, all the companies enjoy the large-cap characteristics such as easy access to capital, established financial track record, relatively stronger balance sheets, anointed industry leadership and generally robust business.
According to WhiteOak Capital, the present size of Indian large-cap stocks leaves a lot of room for growth. It believes large-caps in India are a fraction of their global counterparts in terms of revenues and market cap and present a sizeable opportunity as India’s per capita GDP growth is likely to lead to an inflection point across various sectors.
Runway for growth
In terms of total market capitalisation, India is few decades behind in comparison to the US and China. There are only three Indian companies in the top-100 global companies in terms of m-cap. With its economy projected to be the third largest over the next decade, India is expected to add a few more names to the list.
Even as Indian large-caps grow, their inherent characteristics will lead to more stable operational performance during economic downturns. Historically, large-cap index has performed relatively better in falling markets.
WhiteOak believes outsized returns can still be earned over time by investing in large-caps. Instead of taking skewed macro bets on sectors or on particular style, it aims to focus on stock selection.
In the existing large-cap fund space, on an average, about 84 per cent assets are in large-cap stocks, 8 per cent in mid-caps and the rest in small-caps and cash.
In terms of valuation, it appears that large-caps are better placed. Take a look at the returns generated by some of the popular large-cap funds.
Actively-managed funds are supposed to deliver higher returns than passively-managed benchmarks. But, most large-cap funds are struggling to live up to this expectation.
Over 89 per cent of Indian equity large-cap funds underperformed their benchmark in the five-year period ending June 2022, per S&P Indices Versus Active Funds (SPIVA) India scorecard.
For 1- and 3-year periods, the percentage of laggards hovers around 84-90 per cent. Even for the 10-year period, 67 per cent of such funds failed to match S&P BSE 100.
Not just the minnows, the biggies in the space, namely, Axis Bluechip Fund, ICICI Prudential Bluechip Fund, SBI Bluechip Fund, Mirae Asset Large Cap Fund and HDFC Top 100 Fund were not always successful in beating the benchmark.
So, the WhiteOak large-cap offering has its work cut out.
Our take
White Oak Capital group provides investment management and advisory services for equity assets of over ₹47,000 crore. As a fund-house, WhiteOak claims to bring to the table a large investment team, balanced portfolio construction (mix of pro-cyclical and counter-cyclical stocks), experienced sectoral analysts, tactical allocation to mid-caps, etc.
These attributes are similar to that of large fund-houses which struggled in the last 2-3 years.
Sustained outperformance in actively-managed large-cap mutual funds is not easy. This has been especially true after the SEBI categorisation exercise and stricter true-to-label mandates. Our proprietary Star Track MF rating system accords 5 stars to three funds: Canara Robeco Bluechip Equity Fund, ICICI Prudential Bluechip Fund and Mirae Asset Large Cap Fund.
Alternatively, we would recommend long-term investors to stick to passively-managed products such as index funds and ETFs to play the large-cap space in a cost-effective manner.