Harsha Viji, Sunil Subramaniam and S Krishna Kumar talk about the rationale of launching their new Select Micro Cap Fund.
What is the rationale behind launching Sundaram Select Micro Cap Fund?
Macro-economic data shows that the economy is bottoming out; Q2 results have been encouraging and markets are reflecting this recovery. Net sales and PAT have seen a clear pick-up in growth. Good monsoon indicates inflation will be 100 bps less compared to last fiscal. Hence, it is good time to enter the market. Having said this, we believe that time in the market is much more important than timing the market.
India is a land of first generation entrepreneurs who focus on innovative products and services. Many companies like Hero, CRISIL and IPCA laboratories that came up with such ideas had started off as micro-cap companies and are now leading their peer group. We have observed that many stocks in micro-cap space have witnessed an expansion in sales and profit and quite a few have become valuable acquisition targets. At present, the Small Cap Index is trading at a 47% discount from its historical high in January 2008 and this suggests that many of them are available at bargain prices.
Also, historical data shows that micro-cap stocks have returned 14x in 5 year period 2003-08 during the economic and market up cycle.
You mentioned that many micro-cap stocks are trading at low valuation. The same principle applies to open ended small cap fund also. Why do you need a new fund?
Investors are generally confused about when to exit in an open ended fund. They, sometimes, redeem their investments after booking a small profit thereby losing the opportunity to get good returns in the long run. Also, due to such redemptions, fund managers have to sell assets which affects the entire portfolio and existing investors. Such pressures are like bouncers which keep fund managers on the back foot.
Close ended funds give adequate time and flexibility to fund managers. It helps in protecting the interests of investors. There is a great chance that the fund will perform better in close ended funds over a long period of time.
What would be the investment strategy?
The fund will invest in stocks that are equal to and greater than 301st stock in the NSE. It will follow bottom up approach, however, the fund will predominantly invest in multinational companies. The fund manager will aim at building a 30-stock portfolio based on extensive research.
We have chosen MNCs as these companies have great export potential, strong management, leadership in technology and global consolidation. Another advantage is the increase in free float of MNCs stocks and limited number of players.
The fund seems to be risky since microcap stocks are more prone to volatility. What will be the fund management strategy to shield the fund from impact of volatility?
The fund manager proposes to adopt an investor-friendly dividend policy to ensure that liquidity is not restricted. Dividends maybe declared between NAV bands of Rs. 12 to Rs. 16.
The fund manager will book 50% of the profits in stocks that rise more than 400%. If the 400% rise happens within three years, the fund manager will reinvest in new micro-cap ideas. If it happens after three years, the fund manager will deploy the proceeds outside the micro-cap theme to help protect investor interest.
Are you confident that fund will achieve its goal in five years?
Performance of micro-cap funds largely depends of economic outlook of the country and we are very confident that the economy will grow in the coming months. We will select stocks based on our research and growth prospects of companies. We believe that the stage is set for the next up-move in the economy and markets and the micro-caps are set to outperform their large-cap space over a period of four-five years.
Any new products in the pipeline?
We will launch series II of Sundaram Select Micro Cap Fund in January. We have filed offer document for another three series of micro-cap funds. We have also filed offer documents for three series of RGESS and two global funds – the first will focus on economies like US and Japan and the second seeks to invest in top 50 global brands (bluechip). Most of these funds will be launched within in six to nine months.
