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Small-cap equity schemes start to show better returns

Funds recover in last one year, but 2-yr record still below average These are only three equity diversified schemes in the MF industry whose investment focus is entirely on small-cap stocks

MOST fund managers tend to avoid taking on small-cap equity schemes given the challenges their small size and investment objective imposes on them. There are only three equity diversified schemes in the mutual fund industry whose investment focus is entirely on small-cap stocks, and they have overcome challenges to deliver a good performance.

Financial Chronicle Research Bureau analysed the Capitaline NAV data on one-year and two-year returns given by the growth plans of each of these three equity diversified small-cap schemes — DSP BlackRock Micro-Cap Fund, HSBC Small Cap Fund and Reliance Small Cap Fund — and found an improvement in their performance in the past one year, against their relatively longer-term performance.

While all the three small-cap schemes outperformed their benchmark, BSE Small Cap Index, in both the periods (see chart), were seen to be trailing their 39 peers in the equity diversified mid-cap schemes category. As on January 25, the small-cap schemes of DSP BR MF and HSBC MF each, delivered a one-year return of 23.5 per cent, followed by Reliance Small Cap Fund's 21.6 per cent. These three not only outperformed their common benchmark index,

BSE Small Cap, but also outperformed the respective one-year returns of large-cap and mid-cap indices of S&P CNX Nifty and CNX Midcap (see chart).

Interestingly, however, the highest of these three schemes' one-year returns was lower than the average of the one-year returns of 39 equity diversified midcap schemes, which was seen to be as high as 27.8 per cent. Among those midcap schemes, the highest one-year return was 41.1 per cent (Axis Midcap Fund) and the lowest was 14.4 per cent (Sahara Midcap Fund).

Large-cap schemes, on an average performance, could not beat returns of the small-cap schemes. The average of one-year returns of 60 diversified large-cap schemes was 19.7 per cent.

The longer-duration of small-cap schemes represented a mixed bag with DSP BR Micro-Cap giving a compounded annual growth rate (CAGR) of 5.1 per cent return, followed by Reliance Small Cap's CAGR of 3.3 per cent return and HSBC Small Cap's negative CAGR of 9.4 per cent.

While these were better than benchmark BSE Small Cap Index's negative CAGR of 10.8 per cent return, they trailed the mid-cap schemes' average CAGR of 6.8 per cent return and large-cap schemes' CAGR or 3.7 per cent return.

As on December 31, the three small-cap schemes' portfolios revealing interesting diversity. DSP BR Micro-Cap was invested in 46 stocks and the average market cap of the portfolio per every Rs 1 crore of assets was Rs 201 crore. Reliance Small Cap had 47 equity stocks in its portfolio with an average market cap per every Rs 1 crore of assets being higher at Rs 814 crore. Clearly, therefore, DSP BR's scheme better represented the small-cap universe.