Revisiting DSP's equity funds

The funds get ratings ranging from Neutral to Silver, with just one downgrade.
By Himanshu Srivastava |  08-04-19 | 
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About the Author
Himanshu Srivastava is a Research Analyst with Morningstar. He would like to hear from you, but cannot give financial advice.

In May 2018, BlackRock pulled out of its joint venture with DSP, thus ending a decade-long collaboration. Consequently, the fund house was renamed DSP Mutual Fund.

There have been significant changes within the equity investment team as well, with chief investment officer S Naganath exiting the fund house in 2017, followed by equities CIO Anup Maheshwari and fund manager Harrish Zaveri in 2018.

This AMC has shown restraint toward launching new funds. It also stopped accepting fresh inflows into DSP Micro Cap given its large asset size. The move to benchmark its funds against a more competitive total return index (TRI) was also an investor-friendly move.

DSP Top 100 Equity

  • Category: Large Cap
  • Star Rating: 2 stars
  • Analyst Rating: Neutral
  • Fund Manager: Gopal Agrawal
  • Date of Analysis: March 2019

Performance has been on a downhill over the past few years. While broadly the fund’s investment mandate stayed consistent, the series of fund manager changes, with different investment styles, led to portfolio restructuring, which didn’t fructify as per the team’s expectation.

Gopal Agrawal has been at its helm since October 2018.

Although the fund’s investment mandate stays consistent, Agrawal’s investment style is different from his predecessors, which means that the portfolio will go through some restructuring. However, he maintains that it would be a gradual transition in order to safeguard the fund from any adverse impact, which is the right approach.

From this perspective, the portfolio is still evolving, and the execution remains untested. We would like to see the fund come back on track before we can regain conviction in it. For now, it has been downgraded from Bronze to Neutral.

DSP Small Cap

  • Category: Small Cap
  • Star Rating: 4 stars
  • Analyst Rating: Silver
  • Fund Manager: Vinit Sambre
  • Date of Analysis: March 2019

Since 2017, the investment team has been using a basket  approach to investing, which entails taking exposure to a couple of stocks which have the potential to deliver outstanding returns, but at the same time are not conducive to a big position due to various factors. This way, the fund house rides the uptrend in the stock without putting the portfolio at much risk.

The strategy also involves theme-based choices where Sambre scouts for turnaround stories or those firms which are capital-expenditure oriented and linked to the overall economic growth.

The fund’s performance has dwindled in the last two years. We believe that the rough patch is a blip in an otherwise strong track record.

In 2017, Sambre’s investment in stocks from the agro- and specialty chemical segment didn’t work. His overweight position in the struggling healthcare sector dragged its performance down. Exposure to sectors such as textile and building material also didn’t perform well. Also, the market was momentum-driven where quality- and valuation-focused strategies largely struggled.

In 2018, his strategy of having zero exposure to large-cap stocks and not taking cash calls led to its relative underperformance in the year which saw significant correction in the small- and mid-cap segment.

DSP Midcap

  • Category: Mid Cap
  • Star Rating: 4 stars
  • Analyst Rating: Silver
  • Fund Manager: Vinit Sambre
  • Date of Analysis: March 2019

Sambre is cognizant of the risks involved in investing in the mid-cap segment. Therefore, he invests only in high-quality companies.

The strategy also involves theme-based choices where Sambre scouts for turnaround stories or those companies which are capital-expenditure-oriented and linked to overall economic growth. His investments in building materials and auto ancillary are a case in point. He will not shy away from taking big stock specific bets in his high-conviction picks.

Exposure to cash is capped at 7.5%.

The fund hit a rough patch in 2017. Sambre’s relatively high cash exposure in the first six months of the year hurt the fund’s performance in a surging market, exposure in healthcare also proved to be a large detractor. Many stocks, which under Sambre's fundamental parameter didn’t fit the bill, given concern over their balance sheet or promoter group, performed well. Since these stocks were not part of this portfolio, this led to underperformance vis-à-vis peers who owned them. His approach paid off well in the downturn of 2018.

DSP India T.I.G.E.R.

  • Category: Infrastructure
  • Star Rating: 3 stars
  • Analyst Rating: Bronze
  • Fund Manager: Rohit Singhania
  • Date of Analysis: March 2019

The investment universe for this fund is rather restrictive in nature as it does not permit investments in sectors such as technology, consumer staples, autos (consumer-related), and domestic pharmaceuticals. From the sectors eligible for investments, the manager picks only those stocks that fall in the ambit of the fund’s investment mandate.

Singhania has been focusing on companies from sectors such as construction and those related to the surface transportation space (such as ports, roads, and railways) given renewed government focus there. On the economic-reforms front, he has been focusing on the energy space on the back of deregulation of oil prices and gas utility space.

Singhania has a bias for large-cap stocks that accounts for 55%-60% of the portfolio. In the past few years, he has increased exposure to small/mid-cap stocks given that a large number of companies operating in the infrastructure space fall in this segment. Consequently, small/mid-cap stocks accounted for about 39% of the portfolio as of January 2019. Singhania typically constructs the portfolio of 60-70 stocks, with top 10 stocks accounting for roughly 40% in relation to the category average of 45%-50%.

We draw conviction from Singhania’s expertise in this domain given his extensive research experience in infrastructure-related sectors.

DSP Equity Opportunities

  • Category: Large and Mid Cap
  • Star Rating: 4 stars
  • Analyst Rating: Bronze
  • Fund Manager: Rohit Singhania
  • Date of Analysis: March 2019

Rohit Singhania implements an unconstrained, benchmark-agnostic approach without any stock or sector bias while constructing the portfolio. He manages the fund with an aggressive investment style, which entails churning the portfolio frequently to capitalise on the investment opportunities arising in the interim.

He will not hesitate to increase or reduce allocations swiftly in response to rising and falling stock prices. Additionally, he believes in buying and selling huge amounts to make a meaningful difference in the portfolio. He typically scouts for investment opportunities in large-cap names where he sees any trend emerging with regards to (for instance) cash flows or ROE. The mid-cap portion of the portfolio is stable, in line with his belief that they need more time to deliver, which necessitates a longer investment horizon.

While an unconstrained process can be very rewarding; it is risky, too. A wrong bet can lead to significant underperformance.

Also, the absence of a rigidly defined method means investments are made on a somewhat intuitive basis. Hence, it the success of the investment process largely depends on Singhania’s execution skills.

DSP Equity

  • Category: Multi Cap
  • Star Rating: 3 stars
  • Analyst Rating: Neutral
  • Fund Manager: Atul Bhole
  • Date of Analysis: March 2019

Atul started managing this fund in June 2016, and hence it doesn’t have a long-term track record under him. So far, its performance under Atul has been good but not exceptional vis-à-vis peers.

The fund hit a rough patch in 2018 when Atul’s strategy of plying a growth-oriented approach with little heed to valuations and quality bias was out of favour. While the fund did benefit from investments in very high-quality consumer-oriented companies; it’s significant underweight in technology sector and few select stocks such as Reliance, HDFC and Infosys, hurt its performance. This dragged the fund’s performance down vis-à-vis peers and benchmark through Atul’s tenure at the fund’s helm.

We would like to evaluate the fund and Atul’s skills in executing the fund’s investment strategy and deliver outperformance within the multi-cap category over the long-term before building conviction.

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