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DSP BlackRock Micro Cap Fund: A promising bet for the Aggressive Investor
May 28, 2015

A detailed analysis on one of our recommended Mid & Small Cap funds.


Author : iFAST Research



DSP BlackRock MicroCap Fund - a promisiing bet for the Aggressive Investor

DSP BLACKROCK MICRO CAP FUND

A promising bet for the Aggressive Investor


DSP BlackRock Micro Cap Fund is one of the best performing micro cap funds on our platform this year. Since the ascent of a reformist government at the centre in May 2014, some of our mid and small cap funds have not only delivered superlative performance but have also attracted investor’s attention. The said fund was a part of our recommended funds list for the first time in June 2010. However, as the fund had become open-ended only in June 2010, we felt that the analysis on the same was skewed. Hence, the fund did not find a place in our recommended funds list in 2011. The fund has been an open-ended fund for more than 4.5 years now and the results of our model indicate that this is one of the best performing mid and small cap fund we have on our platform today. Vinit Sambre has been at the helm ever since the fund became open-ended in nature. Hence, the superlative performance of this fund can be considered as the track record of the fund manager as well.

Investment Strategy


The investment strategy of this fund as per the Scheme Information Document (SID) is on these lines:

The Investment Manager will use a disciplined quantitative analysis of financial operating statistics. In picking out individual investment opportunities for the portfolio, among the defined universe eligible for investment, the Investment Manager will seek both value and growth. Value is discerned when the Investment Manager believes that the long term growth potential of a company is not fully reflected in the market price of the company’s securities and which potential it seeks to better every year capitalising on its various strengths, which could mean strong brand equity, growing market share, strong management and technological excellence, among others. Growth stocks, as the term suggests, are those stocks that are currently in the growth phase. The super-normal growth could be due to a new product, a new process, growing market share, stronger brand equity, technological breakthrough and unique position in a market, among other factors.

Sambre follows a bottom up approach while selecting stocks in this portfolio.

We quizzed Sambre to give us more details on the strategy that he has been following in this fund, and the criteria taken under consideration when selecting companies for the portfolio. The answers have been summarized below:


Fund Manager Speaks:

Stock Picking Strategy

  • Companies which can be owned not only in a bull market but even in a bear market.
  • Concentrated Portfolio of 45 stocks with the top 10 stocks garnering 40%-45% of the corpus depending on conviction.
  • Sound Businesses with strong fundamentals irrespective of market cycles.
  • Quality of management in terms of their capability and credibility.
  • Past 5 to 10 year performance of the companies across different market cycles.
  • Ratios like Cash Generation, ROC, Incremental Capital Allocation
  • Companies with stable businesses which have consistently delivered across economic cycles will have a higher allocation in the portfolio.
  • Calculated risk will be taken in the form of allocating a small part of the corpus to turnaround companies which are run by good management but impacted by a bad cycle.

Portfolio Analysis


This is a fund which sticks to its mandate of being true to its label. Sambre defined micro cap stocks as those belonging to companies which are beyond the top 300 by market capitalization.

As per the mandate, 65% of the portfolio should be invested in micro cap stocks. On the other hand, 30% of the concentration will be in mid & small cap stocks, while cash allocation will be to the tune of 3% to 4%.The large cap allocation is kept at nil so that it does not change the nature of the fund. According to Sambre, the 35% allocation into mid & small cap stocks and cash acts as a buffer to meet any urgent liquidity requirements.


For the purpose of analysis, we have taken the definition of market capitalization in this way.


Large Cap: Above INR 15,000 crore

Mid Cap: INR 15,000 - INR 5,500 crore

Small Cap: INR 5,500 - INR 3,000 crore

Micro Cap: Below INR 3,000 crore



Fund Manager Speaks:

“For us the top 100 stocks in terms of market capitalization is large cap, the next set of 100 stocks are mid cap, the next set of 100 stocks are small cap and stocks beyond the top 300 are classified as micro cap.”


An interesting observation that can be made here is that during April 2012 to April 2014, the funds average allocation into micro caps was 73%. Since April 2014, we have seen the allocation into this category being reduced to 44.77% in March 2015 vis-a-vis 75.9% in April 2014.


Fund Manager Speaks:

“As per our definition, we have never gone below 65% in Micro-cap category at any point in time. The levels also keep changing due to stocks shifting its category on account of outperformance or underperformance. For eg a Micro cap stock will be classified as Small cap if it outperforms and moves up the ranking.”


We had mentioned in the earlier part of the note that the fund manager believes in having a concentrated portfolio consisting of 45 stocks. However, since April 2014 uptil March 2015, the number of stocks has increased from 44 to 60.


Fund Manager Speaks:

“Last year, we faced strong inflows into the fund. In fact, we had to take measures to limit the pace of further inflows from October 2014. We were finding it difficult to deploy such inflows into micro caps in a short time period as it led to higher impact cost. Hence, as the corpus moved up from Rs.404 crore in April 2014 to Rs.1922 crore in April 2015, we had to increase the number of stocks in the portfolio. Currently we are in the process of consolidation and are looking to work with around 50 to 55 stocks.”


As on March 2015, the fund held 60 stocks out of which 9 of them have been a part of the portfolio during the entire 36 months of analysis. This in short means that the portfolio is actively managed and as Sambre has got his bets right, the overall performance of the fund has also improved drastically over a period of time.


Fund Manager Speaks:

“We follow a buy and hold strategy for our stocks and the time horizon is normally 12-18 months. We try to look at risk in terms of quality of our stocks and do not compromise on that. This strategy seems to have paid off well is likely to continue in future as well”


We had also done an attribution analysis to understand the stocks which have contributed to the returns over a period of 3 years (April 2012-March 2015).The result are given below.

Performance


If on April 2, 2012, an investor had parked a surplus of INR 10,000 in DSP BlackRock Micro Cap Fund and the benchmark that is S&P BSE Small Cap Index, then the corpus would have been INR 26,292.61 and INR 16,155.47 by March 31, 2015.


Our Take:


DSP BlackRock Micro Cap Fund, an aggressive bet in the micro cap space is purely run on the conviction of the fund management team. The consistent performance delivered by this fund across the different time periods is a clear indication that Sambre’s conviction, along with the strategy followed by him since he took over the fund is working in the fund’s favour. Aggressive investors who want to create the extra alpha in their portfolio can consider this fund which is true to its label of being a micro cap fund across different market cycles. Investors taking an exposure into this fund after reading this note should be willing to bear with the volatility associated with such a fund and the time horizon needs to be in the range of 3 years to 5 years.

Disclaimer:
iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website.


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