Saturday, April 2, 2016

Small-cap funds ace the benchmark

The BSE Small-cap index was resilient in the choppy markets of 2015 and, in fact, registered a multi-year high in August 2015 even as the BSE Sensex and the Nifty 50 peaked in March 2015. But the Small cap index has witnessed a sharp plunge along with the bellwether indices this year. Small-cap funds that invest in these stocks have performed well in the last one and three-year periods despite the recent setbacks. There are six funds in this category — DSP BR Micro-Cap, HDFC Small & Mid Cap, Reliance Small Cap, Sahara Star Value, SBI Small & Midcap and Sundaram S.M.I.L.E.

The category has delivered an average three-year return of 27.5 per cent, beating the S&P BSE Smallcap return of 18.3 per cent by a big margin. The extraordinary performance in the year 2014 has been holding their three-year returns at higher levels. The last one year has seen the category register losses, but the category average return of a negative 4.7 per cent has still outperformed the Smallcap index’s negative return of 8 per cent.

The majority of the Small-cap funds are benchmarked against the S&P BSE Small-Cap index. The HDFC Small & Mid Cap is benchmarked to the Nifty Small-cap Index while the Sahara Star Value Fund is measured against the S&P BSE 200. Except the Sundaram S.M.I.L.E fund, which has a negative one-year return of 13 per cent, other funds have outperformed their benchmark indices. The SBI Small & Midcap fund has delivered a positive return of 3.5 per cent this year while the DSP BR Micro-Cap fell a marginal 0.5 per cent.

The top two

What made these two funds contain the downsides well? Well-diversified portfolios and a focus on bottom-up stock picking have helped. Both funds allocate 66 per cent of their portfolios to small-caps with the balance in mid-caps. They have no exposure in large-cap stocks. SBI Small & Midcap has a compact portfolio consisting of 25 stocks whereas DSP BlackRock Micro Cap has exposure to as many as 59 stocks.

Chemicals, FMCG and services are the top sectors preferred by SBI Small & Midcap. It is underweight on the healthcare and communication sectors.

Some of the top holdings, namely Solar Industries, TV Today, Manpasand Beverages and Atul have performed well over the past one year. DSP BlackRock Micro Cap also has chemicals as the top sector along with textiles and financials. But it is underweight on FMCG and Services sectors. The fund has top allocations in KPR Mills, SRF, Aarti Industries and Atul that have done well in the last one year.

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