Large-cap stocks in focus for small-cap funds

New Delhi: Besides cash, many small-cap schemes are holding huge quantum of large-cap stocks. The deployment into large-cap stocks by small-cap funds began from May 2022 and continues to expand, showcasing the fund managers’ concerns on the small-cap space, as per a report by Elara Securities.

Currently, six per cent of total small-cap AUM is deployed into large-cap names (previous high was seen in April 2019). A similar trend was seen where small-cap funds were moving into large-caps from January 2018 to April 2019.

“However, during that period, we also saw small-cap stocks underperforming large-cap. Hence, the move was supportive to their positioning. This time, due to the direct retail participation in small-cap space, we are seeing a strong outperformance in the small-cap index. This is hurting the performance and has potential of creating a panic among small-cap fund managers if this trend fails to reverse,” the report said.

As of October 23, small-cap schemes are holding Rs15,500 crore (7.8%) of cash and Rs12,500 crore (6.3%) of large-cap stocks. Average cash levels since 2018 in small-cap schemes is around 6.6 per cent, indicating excess cash of 1.2 per cent.

Likewise average large-cap holding in small-cap schemes since 2018 stands at 4.4 per cent, an excess of 1.85 per cent. This translates into excess of Rs6,100 crore (cash + largecap), which needs to be deployed to reach back to long-term average.

Add to this the consistent inflows into small-cap schemes even now. The performance of small-cap index is still not willing to reverse. Post the Israel-Palestine conflict that started in October, FMs had some hope of small-cap underperformance, but the strong revival after that is again creating pressure, the report said.