By riding the coat tails of small- and micro-cap stocks, DSP BlackRock Micro Cap looks like a market-beating superstar. The fund’s equity allocation is a little over 70% to small and micro caps, the balance in mid caps. This is in stark contrast to DSP BlackRock Small and Midcap which has 16% in large stocks, 24% in small stocks, and the bulk in mid caps. (January 2015 portfolios).
You would be right in thinking that the fund is doing well because of the rally in smaller fare. However, the point I am making is that its returns within the small- and mid-cap category are what stand out.
In seven calendar years of its existence, the fund has always beaten the category average when the market delivered positively. In 2010, it was a chart topper. Last year it delivered an impressive 102%. Even over the periods spanning one-, three- and five-years, the annualised returns make it a top quartile player. Going by its performance in 2008 and 2011, one can assume that when the market crashes the fund tends to slip below the category average.
A micro- cap fund is generally positioned as the spicy wedge of an investment portfolio. But such a sharp focus could be a double edged sword. The fund manager sticks to his investment mandate and refrains from fleeing to the safety of large caps when the going gets tough. Neither does he take refuge in cash; the cash allocation is capped at 7.5%. Investors should then be mentally prepared not to panic during periods of under performance, or even with some all-out unpleasantness.
Senior analyst Himanshu Srivastava recently analysed the fund. He holds the fund company in the highest esteem, is convinced that the research team is of high calibre and fund manager Vinit Sambre is extremely competent. Sambre scouts for companies that have sustainable competitive advantages over their peers and dominant market shares in their industries. He meets with company management and tracks their decisions, and invests only when he is comfortable with the management’s assumptions, forecasts and capabilities.
Nevertheless, Morningstar’s analyst gave the fund a Bronze rating. His reasons are briefly touched upon below.
Sambre invests a portion of the portfolio in companies trading well below their book values, which constitute his value picks. This could lead to a potential value trap.
The nature of the beast is that smaller stocks could get embattled in liquidity issues should the need to sell arise. If money flows in and gets pulled out at the slightest sign of turbulence, it would be a tough situation for the fund manager trying to offload such stocks.
Finally, will Sambre be able to deliver such returns if the fund increases in size? A growing asset size can pose challenges in the form of market-impact cost and opportunity cost. In fact, the increase in the size of assets has led to the fund manager increasing the number of stocks in his portfolio.
A wise move on part of the fund house has been to restrict investment to this fund to Rs 2 lakh per subscription.
Our advice: When investing in such a fund, keep an eye on long-term returns. The ride could be rocky, but that comes with the turf. Thus far, this fund has delivered.
To read a brief analysis on DSP BlackRock Micro Cap, click here.
