Vinit Sambre, Fund Manager, DSP BlackRock Mutual Fund talks to Cafemutual about the rationale behind launching DSPBR Three Years Close End Equity Fund, its investment strategy, challenges in managing small cap funds and more.
The BSE Small Cap Index and BSE Mid Cap Index have run up 85% and 61% over the last one year, respectively. Do you think there is room for further upside from these levels?
The market sentiments have revived over the past six months. The real pickup in growth is still three to four quarters away. We have faith in government’s efforts to carry out reforms. Despite the rally, the markets today are trading at 14-15 PE multiples. There is scope for PE re-rating as well. The earnings growth are also likely to grow in double digits.
There is still a decent upside from current levels. The next two to three years look very promising. However, there could be some consolidation in the near term since markets have run sharply and fundamentals are yet to catch up. We don’t foresee any major correction in the markets since there are multiple triggers for the markets to remain upbeat.
How would this fund be different from DSPBR Micro Cap Fund and DSPBR Small & Mid Cap Fund? Do you think there would be some amount of overlap in the portfolios of these three funds?
We will focus on small and mid-cap stocks. Our DSPBR Micro Cap Fund has reached Rs. 1,500 crore size now. At this size it becomes difficult to manage the fund. Hence we have stopped large ticket investments in this fund. DSPBR Closed End Equity Fund will not be constrained by size as we are looking to raise about Rs. 500 to Rs. 600 crore in this fund.
DSPBR Micro Cap Fund has to mandatorily invest 65% of its assets in micro-cap companies at all times. DSPBR Closed End Equity Fund will not have such restrictions. This will be a more concentrated portfolio consisting of 30-35 stocks. Some amount of overlap between DSPBR Micro Cap and DSPBR Small and Mid Cap Fund cannot be ruled out though. While the stocks can be same in DSPBR Micro Cap Fund and DSPBR Closed End Equity Fund, the weightage of exposure to common stocks would vary.
How is your closed end fund different from the ones launched by your peers?
In terms of the structure, it is similar to any other closed end equity fund. But we are not looking at launching a series of funds.
DSP BlackRock has not been a proponent of closed end structure. However, the thought process this time is that a large amount of money is chasing small cap stocks. Investors are looking at making quick returns which is a bit scary. Investors now have to look at a slightly longer term horizon. The closed end structure brings discipline.
What is the investment strategy of this fund?
We’ll use bottom up stock selection approach. We’ll pick companies which have good management, decent cash flows, good ROCE, and companies having competitive advantage. We have identified some companies and will revisit them once the NFO period is over.
We’ll follow a buy and hold strategy. Churning doesn’t give a good impression about a fund manager’s ability to identify stocks. This fund would be managed just like the way we manage DSPBR Micro Cap Fund.
From a fund management perspective, what are the challenges in managing a closed end small/mid cap fund vis-à-vis an open end small/mid cap fund?
The challenges are same as they are with managing an open end fund which is to identify good companies. We should have faith in the companies which we invest in even during a period of consolidation. Since investors keep reviewing the performance very often, the challenge would be to manage it’s near term as well as long term performance.
Within the small and mid-cap space, which sector/themes are you bullish on?
We believe agro sector have good potential. Some of the mid-sized companies in the agro space are doing well. In the financials space, we are bullish on NBFC companies. As the economy revives, engineering companies will also benefit. Auto and auto ancillary companies are also likely to do well.
Some of your peers have launched closed end equity funds almost a year back. Do you think you should have come up with this fund earlier?
We didn’t feel the need to launch it earlier because we anyway had the DSPBR Micro Cap Fund. When the scheme’s size hit Rs. 1,500 crore we felt that getting further inflows in the same scheme would be detrimental to investors.
We have never launched funds looking at our peers. We launch funds with a high amount of conviction and even if it may not be in sync with market trend. We launch funds only if there is an investment need.
What are the risk mitigation strategies you will deploy in this fund?
The biggest risk is the investment risk. Our business is to take risk we have to take calculated risk. We will follow the regulatory and internal guidelines of risk management.
Some of the closed end funds launched in 2007 did not live up to their expectations. Do you think the situation is different now? If so, why?
The economy tanked after the industry launched closed end funds in 2007. Now the scenario is completely different. The case for equities is much stronger now as compared to other asset classes like gold, real estate and fixed income. The interest rates are likely to come down which itself is a big trigger for the market. The Indian economy is looking more promising as compared to other economies like China.
What kind of investors is the fund suited for?
Investors with a two to three year time horizon having a higher risk appetite can consider this fund. I feel that any investor who is investing now in any equity fund should invest with a three year horizon because markets have run up quite sharply and is trading at higher multiple from FY15 perspective.
You also manage DSPBR Technology.com Fund. How is this fund different from the other technology funds in the industry?
Our benchmark is BSE Teck while some of the peers are benchmarked towards BSE IT Index. Our fund can invest in IT, Telecom and Media whereas some of our peers can only invest in IT sector. Thus, it has a broader investment mandate which helps the fund to diversify.
What is your outlook on IT sector?
We currently have a neutral outlook on IT. It companies have gained in the last two years because of the rupee depreciation. So that benefits seems to be going away now. Within the IT sector, there can be variation in the performance of each company. Thus, we’ll take more stock specific approach now.
Vinit manages DSP BlackRock Technology.com Fund, DSP BlackRock Small & Mid Cap Fund, DSP BlackRock Micro Cap Fund and DSP BlackRock MIP Fund.
