This fund got off to a rough start. Launched in the last quarter of 2006, it underperformed its peers in 2007 and put in an average show in 2008. However, its performance since 2009 has been nothing short of impressive. Over the three-year period ended October 31, 2011 it has delivered an annualized return of 37 per cent (category average: 29%).
In 2007, two sector calls backfired. The fund remained underweight in Metals and only in the second half did it lower exposure to Technology. That year, BSE Metals delivered 121 per cent while BSE IT lost 14 per cent.
In 2008, the cash and debt calls helped limit its fall with a combined exposure of 26 per cent in November 2008. Like other funds, increased exposure to FMCG and Healthcare too helped.
Since then, the fund has been on a roll with top quartile performances. The fund was the seventh best performer in 2009 and eighth in 2010. This year the fund registered a fall of 11.36 per cent (category average:-12.68%) as on October 31, 2011.
The mandate of this fund is to invest in stocks which are not a part of the top 100 stocks by market capitalization. While the universe is huge, the final selection is done through a bottom-up stock selection process after considering ratios such as Price-to-Earning, Price-to-Book and Price-to-Sales. What stands out here is that the fund invests in stocks with a high PE and PB. Currently the fund has the highest Weighted PE ratio in the ‘Equity: Mid & Small Cap’ category. The weighted PB ratio of the fund is also among the highest in the category. The fund manager also looks at growth, improving margins, assets and cash flows.
Though the fund invests in a mix of mid and small caps, it prefers going more with smaller companies. As a result, its weighted average market capitalisation has always been lower than the category average.
If investors view that as risky, then they would be happy to note that the fund manager attempts to mitigate that risk with a diversified portfolio of around 64 stocks (average over the past one year) with the top five holdings accounting for around 17 per cent. The same principle is followed in the sector bets where rarely has allocation to a single sector exceeded 15 per cent. The portfolio is churned fairly rapidly resulting in a high turnover ratio.