The Hindu Business Line : `Valuation of small-caps is compelling'

A closed-end structure is better for a small-cap fund as it offers the luxury to take long-term calls without daily pressures. — ANOOP BHASKAR, FUND MANAGER, SUNDARAM BNP PARIBAS

Sundaram BNP Paribas Mutual Fund is shortly rolling out two new closed-end funds — Select SmallCap and Equity Multiplier. Both products have a cap on fund size (Rs 330 crore for the SmallCap Fund and Rs 550 crore for the Equity Multiplier) and will follow a more concentrated approach to investing than existing funds from the stable. The fund manager, Mr Anoop Bhaskar, explains the rationale for the new launches and discusses the proposed investment strategies in depth.

Excerpts from the interview:

What is the rationale for the Select SmallCap Fund and where will it invest?

Sundaram Select SmallCap will invest in stocks of small-cap companies. We define small-cap stocks as those with a market capitalisation below that of the 100th stock in the CNX-500 index. Currently, this threshold is at Rs 5,000 crore. The BSE Smallcap index has been in bearish mode over the past year; peaking in September 2005 and lagging the market since.

We believe this is one segment where, even if the market is at 14000 levels, the valuations are compelling. There are several companies that we like, trading at price earnings multiples of just 7-8 times, half the levels for large-cap stocks. We believe there are several companies whose sales will double in 3-4 years time and so should their market value. The top ten stocks in this fund will make up 35-40 per cent of the corpus and we hope to maintain the average market cap at about Rs 1,000 crore. We will try to have 20-25 per cent of the portfolio in companies with a market cap of less than Rs 1000 crore, 25-30 per cent the Rs 1000-2000 crore range and the balance in over Rs 2000 crore.

Though a purely small-cap fund should focus on stocks below the Rs 1000 crore threshold, there are practical constraints to doing that. One problem with going for very small-cap companies is that the regulators and the stock exchanges tend to be very stringent in shifting stocks to the trade-for-trade segment and that leads to very low liquidity. This is one of the reasons why we adopted a more flexible definition for this fund.

Sundaram BNP Paribas already runs S.M.I.L.E fund, which targets small-cap stocks. Isn't there a high degree of overlap with that fund?

Not really. The S.M.I.L.E was a multi-cap fund that aimed to have a sizeable allocation to small-cap stocks. But there are certain practical constraints to operating a small-cap fund with an open-end structure. If you are an open-end fund, your performance tends to get rated on the same basis as all other open-end funds, with investors making no distinctions between mid-cap, small-cap and large-cap funds.

Hence, if the market is oriented towards large-cap stocks, if you are running an open-end fund, you too have to have an allocation to large-caps to ensure performance. This is why we thought a closed-end structure is better for a small-cap fund. In a closed-end fund, you have the luxury to take long-term calls which can turn out to be multi-baggers, without daily pressures.

Closed-end funds launched earlier have not delivered good performance. Doesn't a closed-end fund give an undue advantage to the fund manager?

We are aware of that. That is why we have set a cap on fund size, which we believe offers comfort to investors. Setting out how much we plan to raise in advance will help us deploy the funds quickly and stick closely to our mandate.

We thought that a time period of 3-5 years would give investors enough time to earn healthy returns from their investment. Also, provided the fund fares well, we will be aiming to declare dividends from the third year onwards so that we return cash to investors as and when good returns accrue. This should help work around the constraint of the lock-in period, for investors.

Who are the target investors for this fund?

We are not targeting first-time investors. This fund is for experienced younger investors who already have an equity investment. Such investors can allocate 10-15 per cent of their portfolio to small-cap stocks through this fund and expect a reasonable return over a 5-year period.

We feel that very few retail investors have really benefited from staying invested through the entire rally of the past five years. This fund, by being closed-end, instils the discipline to stay invested for a five-year period. Unless we are really unlucky, we should be able to deliver with this fund, especially given the fund size.

Where will the Equity Multiplier Fund invest and who are its target investors?

This is a select focus fund with a closed-end structure; the top ten stocks may account for about 35-40 per cent of the assets. We found that investors often shell out relatively high fees to portfolio management services to acquire a concentrated portfolio.

The Equity Multiplier Fund will offer such investors a concentrated portfolio within the fee structure of a mutual fund. We will invest across sectors and market capitalisation ranges, with a larger weight to large-cap stocks. We will try and target absolute returns; with clear profit triggers on each stock which we will stick to, irrespective of market conditions. We may take concentrated stock and sector calls (within SEBI limits, of course). This fund could have a high churn, with certain portions of the portfolio set aside for say, six-month and one-year calls. While this will be an aggressively managed fund, the Select SmallCap fund will be a buy-and-hold fund.

More Stories on : Interview | Mutual Funds

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page