Small Cap Funds have the potential to create significant wealth and alpha over the long term, albeit at higher risk compared to other equity mutual fund categories. Investment in Small Cap Funds is a good way to uncover the potential of multi-baggers of tomorrow while they are still relatively undiscovered.
If you have a high risk appetite with the ability to handle short-term volatility and a long-term investment horizon, Small-cap Funds can be included in the satellite part of your equity mutual fund portfolio. With valuations once again soaring high on the equity market, it is important to be selective and stay invested in high-quality names having higher growth potential.
Quant Small Cap Fund is an actively managed Small Cap Fund that has recorded extraordinary performance in the last couple of years to stand among the top performers in the category across time frames.
Graph 1: Growth of Rs 10,000 if invested in Quant Small Cap Fund 5 years ago
Past performance is not an indicator of future returns
Data as on November 16, 2022
(Source: ACE MF)
Incepted in January 2013, Quant Small Cap Fund is a small-sized scheme in the Small Cap Fund category that follows aggressive investment strategies. Quant Small Cap Fund follows an active investment approach whereby it constantly hunts for attractive opportunities, which makes it sector and benchmark agnostic. The fund’s small corpus gives it the advantage of easy liquidation and the ability to quickly shift allocation in line with dynamic market conditions. Notably, Quant Small Cap Fund witnessed significant underperformance between 2016-2019. Nonetheless, the fund witnessed a turnaround phase in recent years and handsomely rewarded its investors. The fund’s higher exposure to certain sectors such as Engineering, Cement, and Consumption, proved to be extremely rewarding in the last couple of years. Consequently, its AUM has grown from just Rs 59 crore as of October 2020 to Rs 2,355 crore as of October 2022. In the last five years, Quant Small Cap Fund has registered growth at a CAGR of 23.3%, compared to a growth of 8.4% in its benchmark Nifty Smallcap 250 – TRI. An investment of Rs 10,000 in Quant Small Cap Fund would have now nearly tripled to Rs 28,477.
Table: Quant Small Cap Fund’s performance vis-á-vis category peers
|Scheme Name||Corpus (Cr.)||1 Year||2 Year||3 Year||5 Year||7 Year||Std Dev||Sharpe|
|Quant Small Cap Fund||2,355||3.87||50.67||52.46||23.27||18.58||32.35||0.40|
|Nippon India Small Cap Fund||22,844||8.66||46.59||35.36||17.88||20.82||28.03||0.32|
|Kotak Small Cap Fund||8,614||-3.40||39.96||33.68||17.86||19.48||26.93||0.32|
|Union Small Cap Fund||1,161||4.66||38.35||31.42||15.34||15.49||25.64||0.31|
|ICICI Pru Smallcap Fund||4,388||3.71||42.71||31.21||14.85||16.54||27.69||0.29|
|SBI Small Cap Fund||14,869||8.00||37.18||30.39||17.13||21.45||23.67||0.31|
|DSP Small Cap Fund||9,082||1.27||34.16||30.36||12.83||16.15||26.56||0.29|
|L&T Emerging Businesses Fund||8,496||4.69||44.31||29.35||13.27||19.15||27.67||0.27|
|Axis Small Cap Fund||10,992||4.46||36.24||28.63||20.09||20.11||23.20||0.30|
|HDFC Small Cap Fund||14,100||4.27||40.56||28.11||14.52||18.30||28.01||0.25|
|Nifty Smallcap 250 – TRI||-2.85||35.37||26.94||8.36||12.84||30.51||0.24|
Returns are point to point and in %, calculated using the Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on November 16, 2022
(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 of future returns. The percentage returns shown are only for indicative purposes.
Despite being small in size, Quant Small Cap Fund has registered extraordinary performance and handsomely rewarded its investors. In the last 2-year and 3-year period, Quant Small Cap Fund has outpaced the benchmark by a remarkable margin of 15-25 percentage points and also stood as the category topper. Its superior performance in the recent past has boosted its long-term returns. The fund has now found a place among top-performing schemes, boasting superior returns across time frames.
The volatility registered by the fund is higher than the category average as well as the benchmark. However, Quant Small Cap Fund has managed to reward investors remarkably for the level of risk taken. Its Sharpe ratio, a measure of risk-adjusted return, is currently the best in the category.
Investment strategy of Quant Small Cap Fund
Categorised as a Small Cap Fund, Quant Small Cap Fund is mandated to invest a minimum of 65% of its assets in stocks of small-cap companies, i.e., companies ranking 251st onwards in terms of market capitalisation. The fund also allocates around 20-30% of its assets in stocks of large-cap and mid-cap companies. Quant Small Cap Fund adopts a quantitative approach to select high-growth potential stocks based on relevant market, industry, sector and economic parameters. This quantitative approach is based on the fund house’s proprietary VLRT framework, viz. Valuations, Liquidity, Risk, and Timing. Here are the key features of the framework:
Valuation Analytics: Knowing the difference between price and value
Liquidity Analytics: Understanding the flow of money across asset classes
Risk Appetite Analytics: Perceiving what drives market participants to certain actions and reactions
Time: Being aware of the cycles that govern how the other three dimensions interact
This framework enables the scheme to understand the various investment trends, thereby allowing it to select high-growth potential stocks. The fund holds many of its stocks with a short-term view, and as a result, Quant Small Cap Fund usually has recorded a high turnover of 70-500% in the last two years.
Graph 2: Top portfolio holdings in Quant Small Cap Fund
Holding in (%) as of October 31, 2022
(Source: ACE MF)
Quant Small Cap Fund usually holds a well-diversified portfolio of 55-60 stocks at any point in time. As of October 31, 2022, the fund held 57 stocks in its portfolio, with the top 10 stock holdings accounting for around 44.8% of its assets. Two large-cap stocks viz. ITC and Ambuja Cements currently form the fund’s top holdings, along with small-cap names such as IRB Infrastructure Developers, HFCL, RBL Bank, and The India Cements, among others.
In the last one year, Quant Small Cap Fund benefitted the most from its holdings in ITC, Shree Renuka Sugars, EID Parry (India), The India Cements, and KSB, among others. It booked profits in ICICI Bank, Easy Trip Planners, Hindustan Aeronautics, L&T, Grindwell Norton, and Linde India, among others.
The top 5 sectors in Quant Small Cap Fund’s portfolio accounted for around 57.2% of its assets. It holds higher weightage in Consumption, Cement, Engineering, Transportation, Banks, and Pharma. Media, Chemicals, Telecom, and Textiles figure among the other prominent sectors in the fund’s portfolio.
Quant Small Cap Fund stood strong during the 2020 market crash, wherein it outpaced the benchmark and many of its peers. Moreover, the fund topped the category returns in the ensuing bull phase, thereby generating significant alpha for its investors. Quant Small Cap Fund is quick in its approach to shift allocation between market caps and sectors depending on the market conditions.
With significant exposure to stocks in the small-cap and mid-cap segments coupled with the active investment approach followed by the scheme, the volatility registered is higher than the benchmark and many of its peers. Nonetheless, the remarkable returns generated by the fund have helped it score high on risk-reward parameters.
The aggressive investment mandate followed by Quant Small Cap Fund makes it suitable only for investors with a very high risk appetite and an investment horizon of at least 7-10 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