At a time when most small-cap funds are trading in red, there is one fund that has bucked the trend. Delivering a return of 4 per cent over the last one year (as on September 09, 2019), Axis Small Cap Fund has shown tremendous resilience. This is the only fund in small-cap category (one-year performance) with positive returns. The next fund in the list – ICICI Prudential Small Cap Fund- is down by 8 per cent and average category fall is 16 per cent.
Despite a concentrated portfolio, Axis Small Cap Fund has always provided better downside protection to investors compared to its peers. In 2018, when the average fall in the category was 18 per cent, the fund had lost just 9 per cent. However, during the rising market, the fund has either delivered close to the category average or has underperformed slightly. If we look at the long-term performance, the fund has been a comprehensive outperformer in its category. It has delivered an annualised return of 13 per cent over the past five years compared to an average return of 9 per cent delivered by the category and 4 per cent by its benchmark, S&P BSE Small Cap TRI. With 32 stocks, the portfolio of the fund looks relatively concentrated compared to its peers. However, the strategy of investing in selective stocks has worked well for the fund.
Fund manager Anupam Tiwari, who is managing the fund since October 2016, spoke to Business Today about how the fund has been able to buck the trend.
Business Today: What has resulted in the outperformance of the fund over the past one year?
Anupam Tiwari: Our philosophy of buying businesses with good operating parameters such as return on equity (RoE), cash flow and stable balance sheet (meaning low debt) has helped us outperform over the past one year.
BT: What is the investment philosophy of the fund?
Our philosophy is to buy good businesses run by good people. By good businesses we mean businesses that are having good RoE/RoCE, cash flow and scalable and stable balance sheet. We buy companies with good corporate governance practices. In addition, we look for niche or differentiated businesses, which have potential to become larger over the period of time.
BT: The Axis Small Cap Fund currently holds 17 per cent in debt. Is it a common practice or is it because of lack of opportunities in the market?
Cash levels are function of market conditions and inflow-outflow expectation of the scheme.
BT: Being a small cap fund with only 32 stocks and top 10 holdings accounting for 50 per cent of the portfolio, don’t you think the fund is highly concentrated compared to the category where funds on an average have 40-50 stocks?
We believe good stock selection is more important than diversification as risk management tool for small cap portfolios. Generally, diversification alone doesn’t help in reducing risk in the small cap segment. If you look at historical performance of small-cap segment, you will find a wide variation in this category. Hence, it is better to own a smaller number of good stocks rather than creating a sub-optimal large portfolio.
BT: Do you have a buy and hold strategy?
We buy stocks with a long-term perspective and hold the stock till our hypothesis of owning it is holding true. It is difficult to be momentum investor in small cap stocks given low liquidity.
BT: When do you decide to sell a stock?
We keep on evaluating our positions on a continuous basis and whenever we feel that our thesis to own the stock is no longer holding true, we sell the stock.
BT: Past few months have not been great for small cap stocks. What would your advice be to investors?
Small cap investing is inherently more volatile and requires a long-term time horizon (more than five years) to generate good compound annual growth rate (CAGR). Hence, investor should be willing to face this volatility and have a longer-term time horizon before investing in our small cap fund. With evolution of our economy, we see lot of potential in small businesses to grow. There are structural changes underway in the way small businesses used to operate (such as availability of risk capital, goods and services tax giving a better operating environment for organised players, e-commerce giving a better distribution channel). We believe that over the medium to long-term these changes will benefit the segment. However, the key for investors would be to have a disciplined strategy with a long-term horizon for making money in small caps rather than just chasing returns.