While quite a few pockets of tiny caps have turn out to be fairly high-priced, one can nonetheless choose and pick inside the significant universe of tiny caps and locate effectively-managed tiny caps that are nonetheless readily available at affordable costs. Thus, investors with a extended-term horizon and tolerance for volatility may well continue to invest in this category, says Chirag Setalvad, Senior Fund Manager-Equities, HDFC Asset Management Company Limited.
In an exclusive interview with Sanjeev Sinha of FE Online, he shares his views on the functionality of the tiny cap category in current years, and no matter whether it is the appropriate time to invest in these funds. Excerpts:
When do you sell a stock?
We may well pick to sell a stock for quite a few motives. Firstly, we would look to sell a stock when it meets or exceeds our fair worth target. This target is arrived at based upon the investment team’s study and evaluation. Secondly, we may well exit or trim our holding in a specific stock if we locate a improved option chance elsewhere. Thirdly, we may well sell a stock from a portfolio danger management point of view in view of managing sector and stock-distinct exposure. Finally, we would look to exit or trim our holdings when our hypothesis concerning the investment turns out to be incorrect.
How do you include volatility in the fund?
Managing portfolio danger and volatility is really essential. On the one hand, we focus on superior excellent organizations that are effectively managed and are readily available at affordable costs. This aids decrease basic danger from a excellent of company standpoint and price tag danger from a valuation point of view.
In addition, we think in managing portfolio danger by preserving a effectively-diversified portfolio across stocks and sectors which really should support include volatility. The portfolio is ordinarily effectively diversified across stocks and portfolio concentration is kept at sensible levels. At present (30-Jun-21) we have 65 stocks in the portfolio with best 10 holdings at ~38%. Lastly, even though the fund is largely invested in tiny caps, it does have an exposure to mid and significant organizations as effectively.
With your fund’s asset size above Rs 10,000 crore, are there any constraints in managing the fund?
No, we feel the fund size does not pose a meaningful constraint. Most importantly, our investment philosophy and stock choice method has not changed in spite of an boost in the fund size. We continue to focus on organizations of affordable excellent that are readily available at sensible valuations and create the portfolio on a bottom up basis. We have held a equivalent quantity of stocks and maintained steady diversification more than time. We have also had a regularly low portfolio turnover. Increase in fund size notwithstanding, we have maintained the sanctity of the solution and stayed accurate to our investment mandate.
As per the last industry cap categorization released by AMFI (Jun-21), the industry cap variety of tiny cap organizations is beneath Rs 11,819 crore, with a cumulative industry cap of Rs ~25 lakh crore (thinking of 1,310 organizations with industry cap above Rs 150 crore). Thus, we have a significant universe which gives us adequate flexibility in this category.
The fund has remained focused on tiny cap organizations and has not drifted towards significant caps. The weighted typical industry cap of the fund has largely been in line with that of the benchmark. We continue to think that the existing size is manageable. Further, the boost in AUM has to be seen in the context of all round valuations and industry functionality. One desires to bear in thoughts that the fund size has grown more than time, not only due to periodic fresh inflows but also due to capital appreciation.
In view of the sharp rally in tiny caps more than the last year, is there any merit in thinking of an investment in a tiny cap category at this point in time?
It is accurate that Small Caps have rallied sharply from the bottom of Mar’20 with NIFTY Small Cap 100TRI index yielding returns of 134% CAGR from the bottom of 24-Mar-20 to 30-June-21.
However, what one ought to bear in thoughts is that Small Caps had corrected even prior to Covid and had corrected by -22% CAGR from the peak of Jan-18 to Dec-19, i.e. pre-covid.
With the onset of the pandemic in 2020, Small Caps corrected additional and ultimately corrected by -37% CAGR from 15-Jan-18 to 24-Mar-20.
Consequently, even just after a sharp rally of 134% CAGR from Mar’20 to Jun’21, NiftySmall Cap one hundred TRI (as of 30-Jun-21) is barely 5.2% above its level of 15-Jan-18 (a return of 1.49% CAGR). Further, as of 30-Jun-21, NIFTY Small Cap one hundred TRI had 5 year returns of 12% CAGR, which is close to the extended term typical of 11.5%. Hence, the Small Cap rally post Mar’20 has to be viewed against the backdrop of somewhat sluggish returns for close to 2 years prior to that, as viewing it on a standalone basis can be somewhat misleading.
While quite a few pockets of tiny caps have turn out to be fairly high-priced, one can nonetheless choose and pick inside the significant universe of tiny caps and locate effectively-managed tiny caps that are nonetheless readily available at affordable costs. Thus, investors with a extended-term horizon and tolerance for volatility may well continue to invest in this category.
How do you choose stocks for your HDFC Small Cap Fund viz Stock choice philosophy?
We comply with a bottom up stock selecting strategy and recognize organizations with affordable development prospects, sound monetary strength, sustainable company models and superior management excellent. We get stocks with medium to extended-term view in thoughts and look at obtaining organizations trading at sensible valuations. We aim to reduce errors as far as feasible by sticking inside our circle of competence.
Which are the sectors in the tiny cap space that you are bullish on going forward and why so?
We favor to create the portfolio on a bottom up basis rather than from a best down or from a sector standpoint. This is essential as person tiny cap organizations inside the very same sector are not homogenous and can exhibit fairly distinct development and return profiles based on their positioning and the tactic that they pick to adopt. Thus, even though a sector’s outlook can be promising, a specific enterprise inside that sector may well or may well not have vibrant prospects. Having stated that, private capex has lagged for quite a few years and really should choose up and government capex really should sustain and therefore the outlook for the capital goods and building sector seems positive. Financial organizations have faced troubles each with asset excellent and development and factors really should boost as the economy normalises.