SBI Small Cap: A proven player across market cycles - Buy

The fund takes cash and debt calls to contain losses during falling and volatile markets

Investors with a long-term perspective and an appetite for high risk can invest in SBI Small Cap Fund through the Systematic Investment Plan (SIP) route.

Earlier called SBI Small and Midcap, the fund underwent a name change in mid-May 2018 as per market regulator SEBI’s new classification norms.

However, the characteristics of the fund largely remain the same. It has a mandate to invest at least 65 per cent of its corpus in small-cap stocks and the rest in large-/mid-caps and debt.

Performance and strategy

The fund has proved its mettle across market conditions, be it the market fall of 2011, the volatilities of 2013 and 2015, or the 2014 and 2017 rallies.

To contain losses during falling and volatile markets, the fund takes cash and debt calls.

For instance, the fund held only 87-93 in equites during the iffy market conditions of 2015 and the remaining in cash and debt. It was thus able to keep its head above water.

At the same time, it upped exposures in equity to over 95 per cent during most months of 2017 and emerged on top during the rally that year.

Considering the market volatility so far in 2018, the fund has added to its cash/debt in recent months, and has been holding only 90-93 per cent in equities.

Right sector and stock choices also help performance.

In bull-market conditions, industrial products and chemicals are usually among the top sector choices.

In 2017, for instance, stocks such as Avanti Feeds, Hatsun Agro and Gufic Biosciences, held by the fund, more than doubled in the rally that year.

Those such as Relaxo Footwears and Elgi Equipments, to which the fund has exposures, too, gained sharply that year. Given improving consumption, consumer durables and non-durables have also found favour with the fund in the last one year.

Portfolio choices

Thanks to these strategies, the fund has outdone its benchmark, BSE SmallCap Total Returns Index, by 5-11 percentage points over one-, three- and five-year periods.

In these time-frames, the fund’s as performance has been on par with, or better than, peers such as Reliance Small Cap and DSP Small Cap.

The fund usually holds a portfolio of 30-40 stocks. However, the holdings are not very concentrated. It holds 5-7 per cent in the top two or three stocks, but only 1-3 per cent in the rest of the stocks. The rout in small-caps until July this year saw the fund reduce its exposure to small-caps in this period.

Stock picks

While it held 89 per cent in small-cap stocks in its January 2018 portfolio, in its latest July 2018 portfolio, this has come down to 76 per cent.

Techno Electric & Engineering, Westlife Development and Hawkins Cookers are the top three holdings. The fund recently added consumer-durable stocks such as Havells India and Blue Star. It has also invested in recent IPOs such as ICICI Securities, Galaxy Surfactants and HDFC Asset Management.

The fund’s portfolio PE ratio is 23.6, much lower than even the Sensex’s 24.8 per cent.

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