How Top Mutual Fund Managers Are Adapting to Current Market Valuations

The Nifty 50 index has experienced a significant drop, falling approximately 8% over the past month. In light of this market correction, where are top mutual fund managers allocating their capital? To gain insights, we analyzed the portfolios of five seasoned fund managers. This article will delve into three key areas: the amount of cash they are holding, their market cap preferences, and their sector allocation strategies.

Cash Holdings

Despite markets delivering strong returns over the last two years, current stock valuations no longer align with earnings growth. Fund managers are responding to these dynamics by adjusting their cash positions. Naren has notably increased cash holdings in all three of his funds. In the ICICI Pru Value Discovery Fund, cash holdings have more than doubled since the previous year, reaching 10.65%. Meanwhile, Harsha Upadhyaya’s cash positions did not significantly change. The other three fund managers also show no clear trend in their cash holdings.

This data suggests that fund managers are selective in their decision-making. Apart from Naren, other managers prefer to remain invested, minimizing cash hedges to avoid potential performance hits if the market rallies.

Market Cap Allocation

Major indices like Nifty 50, Midcap 150, and Smallcap 250 are currently trading at elevated valuations, particularly with mid-cap stocks commanding a high premium. Let's explore how fund managers are modifying their portfolios.

Harsha Upadhyaya has decreased his mid-cap exposure in most of his funds while slightly increasing his large-cap and small-cap stakes. Conversely, Taher Badshah has increased his mid-cap allocations across three funds, indicating continued belief in specific mid-cap stocks despite the high valuations.

For S Naren and Chirag Setalvad, there was no clear pattern. In some funds, mid-cap allocations have increased, while in others they have remained unchanged.

Sectoral Allocation

To better understand these fund managers' investment strategies, we examined their sectoral allocations over the last two years. Key findings from the top five and bottom five performing sectors are as follows:

Top Performers: PSU, Automobiles, Defense, Realty, and Logistics Bottom Performers: Banks, FMCG, Financial Services, Oil and Gas, Media, and Services

Investors are seeing a trend towards a greater focus on defensive sectors such as Healthcare, Consumer Durables, and Retail, while exposure to high-risk sectors like Automobiles, IT, Capital Goods, Infrastructure, and Telecom is being reduced.

Summary

In conclusion, top mutual fund managers are responding to current market valuations by adjusting cash positions, reallocating market caps, and shifting sectoral exposures. While some managers are increasing their cash reserves to minimize risk, others are fine-tuning their portfolios to avoid high valuations and allocate more to defensive sectors.

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