DSPBR Micro Cap has delivered handsomely during rallies

It certainly is the king of good times. Launched as a closed-end fund, it has delivered impressively during market rallies.

Unfortunately, it does not stand tall during market downturns. In 2008, DSPBR Micro Cap lost 63.35 per cent (category of closed-end funds: -62.46%). That year the 'Equity: Mid & Small Cap' category of open-ended funds fell by 60 per cent. So while the performance of DSPBR Micro Cap was not abysmal, do keep in mind that it held an average 21 per cent in cash and debt for the last eight months of the year.

This year too (as on October 31, 2011), the fund has lost close to the category average but has not gone too aggressive on cash bets or resorting to debt.

In 2009, the fund delivered an astounding 115.82 per cent, beating most of its mid and small cap peers. In June 2010 it turned open-end and grabbed the top position that year.

The fund manager maintains a fairly diversified portfolio of around 47 stocks (average over the past year) with allocation to a single stock rarely crossing 5 per cent. As a result, the top five holdings account for just 24 per cent of the portfolio. Allocation to a single sector has rarely crossed 20 per cent.

Yet, with a focus towards smaller fare, it is still among the riskiest bets in the category and likely to get hit harder during bear phases. The investment universe are companies that are not part of the top 300 stocks by way of market capitalization. Currently, the weighted average market capitalization of the fund (Rs 1,400 crore) is the lowest in the category. The portfolio holds stocks with market capitalization ranging between Rs 114 crore and Rs 7,155 crore. It has the third highest allocation (in its category) with around 77 per cent to small caps which has even gone up to 92 per cent (January 2009).

The fund seems to follow a strategy of target based investing and has the highest turnover ratio. It frequently churns its portfolio as it enters and exits stocks in a short period of time. A relatively smaller size (Rs 467.77 crore) helps. Of the total 296 stocks that have appeared in the fund's portfolio since its launch around half of them (143) have appeared for less than six months.

If you want to take exposure to smaller stocks and are willing to live with the inherent risk, this one is skill fully managed to give you that option.