SBI Small Cap Fund: Sailing through Volatility
Jan 16, 2020

Author: Divya Grover

SBI Small Cap Fund: Sailing through Volatility
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Crash in small cap space in the past couple of years has made mutual fund investors anxious. Many small cap funds generated poor returns after riding the bull phase of 2017. But investors have reason to cheer as the current low valuation in small cap space provides comfort for its future growth.

Even though many small cap stocks are beaten down right now, only a few stocks with strong fundamentals can be expected to bounce back. Thus, if you invest in small cap fund that lays emphasis on quality stock picking and risk management it can potentially reward you over the long term despite being volatile in the short term. Investment in small caps in not for investors who cannot bear market volatility.

SBI Small Cap Fund (SSCF) is one such small cap fund that looks to invest in companies that have potential to be a part of big league.

The fund was launched in September 2009 and currently has a corpus of 3,156 crore under management. SSCF is managed by Mr R Srinivasan (since November 2013) who has total experience of over 26 years.

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

SSCF exhibited extra-ordinary performance in the last five years generating significant alpha for its investors. If you had invested Rs 10,000 in SSCF five years back on January 15, 2015, it would have doubled to Rs 20,095 (as calculated on January 15, 2020). This translates into compounded annualised growth rate of 15%. In comparison, a simultaneous investment of Rs 10,000 in its benchmark S&P BSE Smallcap - TRI would have grown to just Rs 13,418 (a CAGR of 6.1%). SSCF's lead over the benchmark in the past couple of years is commendable as many small cap stocks corrected sharply during this period.

Graph 1: Growth of Rs 10,000 if invested in SBI Small Cap Fund 5 years ago
 
Data as on January 15, 2020
(Source: ACE MF)

 

Graph 2: SBI Small Cap Fund's year-on-year performance

Graph 2: SBI Small Cap Fund's year-on-year performance
 
*YTD as on January 15, 2020
(Source: ACE MF)

Launched in September 2009, SSCF has a track record of little over a decade. The year-on-year performance comparison of the fund with respect to its benchmark S&P BSE Smallcap - TRI shows that fund outperformed the benchmark in 8 out of last 10 calendar years. SSCF trailed the benchmark only in CY 2012 and CY 2016. In other years, the fund not only actively participated in the bull rallies but also efficiently managed the downside risk during bear phases. During the small and mid cap correction phase of 2018-19, the fund fared noticeably better than the benchmark. In the current year, though the fund has trailed the index till now, going forward it has the potential to improve its performance

Table: SBI Small Cap Fund's performance vis-à-vis category peers

Scheme Name Corpus (Cr.) 1 Year (%) 2 Year (%) 3 Year (%) 5 Year (%) Std Dev Sharpe
SBI Small Cap Fund 3,156 -3.99 5.77 15.61 22.63 18.77 0.15
HDFC Small Cap Fund 9,232 -7.22 5.87 14.99 15.69 16.23 0.09
L&T Emerging Businesses Fund 5,941 -11.02 -0.15 13.95 13.70 16.76 0.07
Nippon India Small Cap Fund 8,525 -9.28 1.09 13.23 18.01 18.88 0.07
Axis Small Cap Fund 1,542 8.39 7.87 13.09 16.56 13.09 0.18
Kotak Small Cap Fund 1,360 -5.23 -1.16 8.55 14.48 16.23 0.05
Franklin India Smaller Cos Fund 6,929 -9.32 -2.49 7.33 14.76 15.24 -0.02
ICICI Pru Smallcap Fund 799 -3.61 -2.40 7.05 8.92 17.51 0.03
Aditya Birla SL Small Cap Fund 2,255 -15.08 -6.58 6.54 13.29 19.64 -0.03
HSBC Small Cap Equity Fund 371 -14.90 -6.54 5.04 11.16 20.94 -0.03
DSP Small Cap Fund 4,918 -10.29 -6.45 4.93 15.68 18.64 -0.04
Union Small Cap Fund 327 -10.39 -4.04 4.11 4.78 17.16 -0.01
Sundaram Small Cap Fund 1,057 -14.29 -9.17 3.34 11.21 21.10 -0.05
Quant Small Cap Fund 2 -13.57 -6.06 -1.73 2.78 13.67 -0.26
S&P BSE Small-Cap - TRI -14.50 -5.95 6.58 9.34 19.87 -0.01
Returns are on a rolling basis and in %, calculated using Direct Plan - Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on January 15, 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 outpaced the benchmark and category average across rolling period with substantial margin. The funds outperformance over the category average has been in the range of 5-10 percentage points while when compared to the benchmark the outperformance has been in the range of 10-13 percentage points.

The fund stood among category toppers across rolling periods. HDFC Small Cap Fund, Nippon India Small Cap Fund, and Axis Small Cap Fund were the other top performers in the small cap fund category during the period.

In terms of risk-return profile, the fund registered higher volatility than the category average though slightly lower than the benchmark. Despite this, its risk-adjusted returns were far better than most of its category peers as well as the benchmark.

Investment strategy of SBI Small Cap Fund

Categorised as smallcap fund, SSCF is mandated to invest minimum 65% of its assets in equity and equity related instruments of small cap companies. It can also invest up to 35% of its assets in other equities, debt and money market instruments. Accordingly, the fund invests predominantly in a well-diversified basket of equity stocks of small cap companies.

The fund adopts a blend of growth and value style of investing following bottom-up investment strategy to select stocks for investment. SSCF seeks opportunities in niche businesses with focus on scalability.

Graph 3: Portfolio allocation and market capitalisation trend in SBI Small Cap Fund

Graph 3: Portfolio allocation and market capitalisation trend in SBI Small Cap Fund
Holding (in %) as on December 31, 2019
(Source: ACE MF)

SSCF looks to identify companies with high-growth potential in small cap space with minimum allocation of at least 65% in the category. In the last one year, the fund invested 65-70% of assets in equity and equity related instruments of small cap companies. The fund also seeks opportunities in the mid cap space where it has exposure of 12-18%. It allocates a small portion of its assets (in the range of 2-10%) towards large caps. SSCF does not resist from taking high cash calls where its holding has been between 5-15%.

Graph 4: Top portfolio holdings in SBI Small Cap Fund

Graph 4: Top portfolio holdings in SBI Small Cap Fund-1 Graph 4: Top portfolio holdings in SBI Small Cap Fund-2
Holding (in %) as on December 31, 2019
(Source: ACE MF)

As on December 31, 2019, SSCF held a well-diversified portfolio of 48 stocks. The top 10 stocks constitute 36.7% of its portfolio with no individual stock having exposure of more than 5%. Dixon Technologies (India) has the highest stock allocation of 4.5%, followed by Hawkins Cookers at 4.1%, JK Cement at 4%. Rest of the stocks in the top 10 holding have allocation in the range of 3-4%.

In terms of sector, SSCF has highest exposure to Consumer goods which includes allocation of 18.9% to Consumption and 13.9% to Consumer Durables. It also has major allocation of 19.3% to Engineering. Banks and Finance together form another 11% of the portfolio. The other prominent sectors in the portfolio include Pharma, Hotels, Cement, Chemicals, among others.

Top contributors

In the last one year the fund gained significantly from its top holdings like JK Cement, Relaxo Footwear, Dixon Technologies (India), Blue Star and Hawkins Cookers which together contributed weighted return of close to 8%. The fund also gained from its holdings in HDFC Bank, Alembic, Galaxy Surfactants, Fairchem Speciality, among others.

On the other hand stocks like Bharat Heavy Electricals, Indostar Capital Finance, Tamil Nadu Newsprint & Papers, V2 Retail, Kirloskar Oil Engines, etc. eroded some of its gains.

Suitability of SBI Small Cap Fund

SSCF has superior long-term track record at reasonable level of risk which shows its ability to pick quality stocks at the right time. The fund maintains a well-diversified portfolio of stocks and sectors to avoid concentration risk. Small caps are high-risk high-return investment proposition. Given the fund's small cap bias the fund is prone to high volatility it is only suitable for investors with high risk appetite and 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.

Editor's note:  The last few years have not been among the best for equity mutual funds. While most funds have underperformed or are struggling to match the returns of the benchmark, there are few funds that have the potential to constantly generate alpha for its investors. And we have identified five such high alpha generating funds, in our latest report 'The Alpha Funds Report 2020'. Do not miss our latest research finding. Get your access to this exclusive report, right here!

 

DISCLOSURE AS PER SECURITIES AND EXCHANGE BOARD OF INDIA (RESEARCH ANALYSTS) REGULATIONS, 2014

About the Company including business activity

Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989.

QIS was promoted by Mr Ajit Dayal with an objective of providing value-based information/views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.

'PersonalFN' is a service brand of QIS and was started in the year 1999. In 1999, the Company registered the Domain name www.personalfn.com for providing information on mutual funds and personal financial planning, financial markets in general, etc. and services related to financial planning and research in various financial instruments including mutual funds, insurance and fixed income products to customers. It offers asset allocation and researched investment recommendations through its financial planning services.

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Details of associates

  1. Money Simplified Services Private Limited;

  2. PersonalFN Insurance Services India Private Limited;

  3. Equitymaster Agora Research Private Limited;

  4. Common Sense Living Private Limited;

  5. Quantum Advisors Private Limited;

  6. Quantum Asset Management Company Private Limited;

  7. HelpYourNGO.com India Private Limited;

  8. HelpYourNGO Foundation;

  9. Natural Streets for Performing Arts Foundation;

  10. Primary Real Estate Advisors Private Limited;

  11. HYNGO India Private Limited;

  12. Rahul Goel;

  13. I V Subramaniam.

Disclosure with regard to ownership and material conflicts of interest
  1. ‘subject company’ is a scheme on which a buy/sell/hold view or target price is given/changed in this Research Report;

  2. Neither QIS, it's Associates, Research Analyst or his/her relative have any financial interest in the subject Company; except for one of the research analyst holding units of SBI Small Cap Fund

  3. Neither QIS, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one per cent or more securities of the subject Company, at the end of the month immediately preceding the date of publication of the research report;

  4. Neither QIS, it's Associates, Research Analyst or his/her relative has any other material conflict of interest at the time of publication of the research report except that QIS (PersonalFN) is, as per SEBI (Mutual Funds) Regulations 1996, an associate / group Company of Quantum Asset Management Company Private Limited and Trustees and Sponsor of Quantum Mutual Fund (QMF) and to that extent there may be conflict of interest while recommending any schemes of QMF. However, any such recommendation or reference made is based on the standard evaluation and selection process, which applies uniformly for all Mutual Fund Schemes. The payment of commission (upfront / annualized & trail), if any, for any Schemes by QMF to QIS (PersonalFN) is also at arm's length and as per prevailing market practices.

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Subject Company means Mutual Fund Schemes

Quantum Information Services Private Limited CIN: U65990MH1989PTC054667 Regd. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai - 400 021 Corp. Office: 16 Jolly Maker Chambers II, Nariman Point, Mumbai 400 021.

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