The gradual reopening of the economy has buoyed investors’ sentiments. Many stocks have recovered significantly from their lows of March.

Notably, the small cap index which suffered the most during the market crash has outperformed its large and mid cap counterparts during the rally witnessed in the past week.

Historically, small caps have outperformed the larger caps after economic downturn. However, it is important to note that the pandemic crisis has left many smaller companies struggling for survival. Thus, it is important to be cautious while investing in the small cap segment, taking exposure to only those with strong balance sheets.

SBI Small Cap Fund (SSCF) is one such small cap fund that has a proven track record of identifying fundamentally sound stocks in the small cap space.

Graph 1: Growth of Rs 10,000 if invested in SBI Small Cap Fund 5 years ago

Graph 1

Data as on June 03, 2020
(Source: ACE MF) 

SSCF has managed to outperform its index S&P BSE Smallcap – TRI during bull market phases, while its performance during bear phases too has been encouraging. Over the last 5 years, SSCF has been the top performer in its category and has rewarded investors with a CAGR of around 11.5%, as against 2.3% CAGR delivered by its benchmark S&P BSE Small-Cap TRI; thus generating an alpha of around 9% CAGR for the investors. An investment of Rs 10,000 in SSCF five years ago would now be worth Rs 17,257 as compared to Rs 11,205 in its benchmark. The fund has established itself in the small-cap funds category with superior long term track record.

Table: SBI Small Cap Fund’s performance vis-a-vis category peers

Scheme Name Corpus (Cr.) 1 Year (%) 2 Year (%) 3 Year (%) 5 Year (%) 7 Year (%) Std Dev Sharpe
Axis Small Cap Fund 2,169 -5.39 0.86 4.73 9.06 NA 21.09 -0.02
SBI Small Cap Fund 3,280 -10.17 -6.13 4.33 11.52 22.19 24.03 -0.02
Nippon India Small Cap Fund 6,995 -21.14 -12.81 -3.53 8.09 20.26 25.76 -0.10
Union Small Cap Fund 281 -11.47 -10.86 -4.89 1.00 NA 23.96 -0.13
Kotak Small Cap Fund 1,318 -15.80 -10.51 -4.98 5.30 13.48 23.91 -0.13
HDFC Small Cap Fund 6,835 -30.80 -17.85 -5.04 5.18 11.39 23.74 -0.13
ICICI Pru Smallcap Fund 982 -24.04 -13.16 -7.49 -0.24 8.02 25.16 -0.15
L&T Emerging Businesses Fund 4,268 -27.10 -18.39 -8.25 5.88 NA 23.72 -0.17
DSP Small Cap Fund 3,973 -18.71 -13.20 -8.63 4.05 17.31 24.79 -0.17
HSBC Small Cap Equity Fund 269 -24.86 -18.85 -9.32 0.97 13.16 26.68 -0.17
S&P BSE Small-Cap – TRI -21.43 -16.45 -8.00 2.30 11.19 26.44 -0.15

Returns are point to point and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on June 03, 2020
(Source: ACE MF)
*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

SSCF has been a top quartile performer that has consistently registered above average returns over longer time periods and has outperformed its benchmark S&P BSE Small-Cap – TRI by a noticeable margin. In the recent corrective phase the fund managed to contain the downside reasonably well which helped it generate superior lead over the benchmark and peers. Axis Small Cap Fund is the other top performer in the category.

The fund’s outperformance has come at a relatively reasonable risk. SSCF’s Standard Deviation (24.03%, annualised) is lower than that of its benchmark (26.44%, annualised). In terms of risk-adjusted returns (as denoted by the Sharpe), SSCF is among the category toppers in the small cap funds category and has outperformed its benchmark by a significant margin.

Investment strategy

Categorised as a small cap fund, SSCF is mandated to invest minimum 65% of its assets in equity and equity related instruments of small cap companies. SSCF aims to provide investors with opportunities for long-term growth in capital along with the liquidity of an open-ended scheme by investing predominantly in a well-diversified basket of equity stocks of small cap companies.

SSCF follows a blend of growth and value style of investing. The fund manager looks to invest in high growth oriented multi-bagger stocks of small sized companies, but is cautious about the price he is willing to pay for the stock. He also hunts for temporarily beaten down stocks available at cheap valuation and does not resists from taking few short term calls. The fund follows bottom-up approach to stock-picking and is selective while choosing companies within the small cap space.

Graph 2: Top portfolio holdings in SBI Small Cap Fund

Holding in (%) as on April 30, 2020
(Source: ACE MF)

SSCF usually holds a fairly-diversified portfolio of about 40 to 50 stocks. As on April 30, 2020, the fund held 48 stocks in its portfolio reasonably diversified across sectors. The top 10 holdings accounted for 37.6% of the portfolio. Among its top holdings, the fund held exposure to Hawkins Cookers (5.2%), Dixon Technologies (India) (4.8%), Elgi Equipments (4%), Navin Flourine International (3.8%) and Relaxo Footwears (3.5%).

In the last one year the fund has gained immensely from its holdings in Relaxo Footwears, Hawkin Cookers, Dixon Technologies, JK Cement, Galaxy Surfactants, among others.

The major portion of the fund’s portfolio is currently inclined towards Engineering and Consumer Durables, whereas Chemicals, Consumption, Cement, Financials, Healthcare, among others have been among the other prominent sectors in SSCF’s portfolio. The fund’s portfolio is spread across, cyclicals, sensitive as well as defensive sectors.

Suitability

SSCF has been one of the well-managed schemes in the small cap funds category that built a solid track record for itself in a short span of time and has rewarded its investors well over the years. Its current fund manager Mr R Srinivasan’s adherence to picking high conviction multi-bagger small cap stocks has helped the fund generate market-beating returns across market cycles. However, being a small cap biased fund, SSCF is bound to witness extreme volatility in conditions when the small cap stocks are under pressure or see a sharp correction. This makes SSCF suitable for investors with a very 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.

This article first appeared on PersonalFN here


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