How do you see the valuations in small caps?
Since its peak in Jan 2018, Nifty Small Cap 100 Total Return Index (TRI) has corrected about 35% till date. Nifty 50 TRI for the same has delivered 13% returns. Given the differences in the quality of large caps and small caps, the sharp fall has thrown up some good opportunities in the small cap space. We believe that there are companies in this space available at attractive valuations. Stock selection would be the key factor in picking up the right small cap stocks.
Why do you think small cap funds make sense at this point?
Small cap funds can be a part of a well-diversified fund portfolio for equity investors. While for most investors, the core equity portfolio should be diversified or large cap oriented, adding a small cap fund to the portfolio may potentially add to returns. Hence, based on the investor’s risk appetite, financial goals and investment horizon, small caps funds should be allocated appropriately to one’s equity portfolio.
Tell us about the fund management philosophy of the fund. How it is different from existing small cap funds?
Principal Small Cap fund follows bottom up stock selection investment philosophy. Typically, we look for investment opportunities in stocks where we foresee growth at a reasonable price. The endeavour is to invest in robust businesses, with strong operating metrics and reasonably good growth visibility.
Since small cap funds are prone to volatility, what are the risk mitigation strategies that you will deploy in this fund?
We currently have a well-diversified portfolio across 24 industries and 67 companies. The fund endeavours not to exceed allocation of 4% in single stock. However, currently 2.5% is the highest allocation to a single stock. The portfolio creation process also involves analysis of the liquidity. The fund also invests a portfolio of its assets in large and midcap companies to meet liquidity requirements as well as reduce the volatility.
Which are the sectors you are bullish at this point?
Our portfolio is overweight in Chemicals, where revenue visibility is high, along with stable or improving margins and healthy balance sheet. We are also overweight on financials sector, as we believe deterioration in asset quality will continue to ease, leading to lower provisions and better profitability. We are also overweight on Cement where an uptick in the infrastructure sector may provide demand and price stability. Logistics continue to remain a bright spot in terms of spending and increasing shift to online retailing.
What is the ideal time horizon to invest in small-cap funds?
An investor in small cap fund should consider investment horizon of over 5 years.
