If we look at the 3-year returns of funds in the mid- and small-cap category, there are some very impressive numbers.
Seven funds delivered annualised 3-year returns of 30% or above: SBI Small and Mid Cap, Reliance Small Cap, DSP BlackRock Micro Cap, Franklin India Smaller Companies, Mirae Asset Emerging Bluechip, Canara Robeco Emerging Equities and Birla Sun Life MNC.
Morningstar’s senior fund analyst Himanshu Srivastava, analysed a couple of funds in this category last year.
We look at the four funds rated by him in 2015.
Franklin India Prima
Analyst Rating: Gold
A well-diversified, mid-cap fund, 47% of the portfolio is allocated to mid caps with around 36% to large caps, with the largest stock allocation being just 4.5%.
After three years of underperforming the category average (2006, 2007, 2008), the fund consistently beat the category average over the next six years, but faltered again last year.
Fund manager R Janakiraman scouts for high-quality mid caps that have sustainable economic moats, predictable businesses, consistent earnings growth, reasonably high returns on equity, and low balance sheet risk. He pays what he feels is the right price for a stock as long as he believes in the growth prospects of the business, but generally avoids expensive areas of the market. He is willing to invest in beaten-up stocks or out-of-favour growth companies and then patiently waits for the stock idea to play out, as his investment horizon typically spans a business cycle.
Franklin India Smaller Companies
Analyst Rating: Silver
Also from the same fund house and the same fund manager - R Janakiraman, this fund has around 59% of its portfolio in small and micro caps. For liquidity management, around 15% of the portfolio is in large-cap stocks and up to 10% in cash.
When picking stocks, the fund manager puts more emphasis on due diligence of the company. The focus is on investing in quality companies with low leverage, healthy returns on equity, free cash flows, and consistent growth. He avoids companies that don’t have an established track record.
With a 5-year annualized return of 21.68%, this fund is a promising one.
ICICI Prudential Midcap
Analyst Rating: Silver
Over the 10 calendar years from 2005 to 2015, this fund has outperformed the category average in every up market, but fallen harder in a down market (2008, 2011). Last year, it underperformed the category average (9.21%) with a return of 5%.
The bulk of the portfolio is in mid caps followed by large caps. The latest portfolio reveals just 17% allocated to small and micro caps.
Mid- and small-cap investing is fund manager Mrinal Singh’s forte and value investing his speciality. Though the investment strategy can be termed broadly as growth at a reasonable price, Singh invests a small portion of the portfolio in value stocks as well.
DSP BlackRock Micro Cap
Analyst Rating: Bronze
Fund manager Vinit Sambre is on a roll. The last two calendar years has seen his fund gracing the performance charts with some excellent numbers. The 5-year annualised return of 21% is impressive and over the past 8 calendar years, it has always beaten the category average in an up market. In a down market (2008, 2011), the fund falls harder than average. This should not be surprising considering the portfolio structure: around 87% of the fund’s latest portfolio is allocated to micro and small caps, with the balance in mid caps.
The danger of such a portfolio is the difficult of exiting stocks when liquidity dries up – a common event in the small- and micro-cap space. Having said that, Sambre appears at home with his investing style and has been fairly disciplined in his approach with around 60+ stocks with the largest cornering 4.32% of the portfolio.
All portfolio allocations refer to the November 2015 portfolios of the above funds.