MNC-focus to Bring in Returns

There are few funds dedicated to the micro cap space and now Sundaram Mutual Fund too has launched a five-year, close ended equity fund. S. Krishnakumar, Head Equity, explains to Chirag Madia Sundaram Select Micro Cap Fund's strategy and why investors should invest in it

What will be your strategy for Select Micro Cap Fund?
In the current 'Series I', the strategy will be to predominantly invest in MNCs in the micro cap space. We define micro cap as all those companies whose market cap is less than that of the 301st stock in the National Stock Exchange (NSE). So we have about 75 MNCs and we intend to create a 30-stock portfolio from these. This portfolio will be diversified and stock selection will be through bottom up approach.

Talking about this segment, when we talk of micro caps, the first impression is of high risk, bloated balance sheets and less stock liquidity. However, same is not the case with with micro cap MNCs. They have strong parentage, even though they may be small in India. The parent companies are multi-billion global giants and have big aspirations for India's growth. With technology, brand and experience in different countries, they will be able to enjoy high profitability and gain market share and grow better than others. These parent companies are focusing more and more on their Indian units by brining in new products and investing in capacities. In addition to that, they are also demonstrating their intent by adding stake in the Indian companies through open offers or share buybacks at a significant premium to market price.

We believe this is the best way to bring the investors in equity markets by giving them quality portfolios of MNCs. I would also like to add that valuations of many MNCs are trading at 30-40 per cent discount to their own historical highs, so we definitely believe that valuations are very much in favour. Given all the factors, we believe that we would be able to build a portfolio of quality MNCs with attractive valuations.

What kind of stocks will you buy in this fund?
We would like to keep the portfolio diversified across the sectors, with high bias towards cyclical sectors. So we would be looking at stocks from sectors such as consumer discretionary products, capital goods, industrials and also materials (which includes cements and metals). I would not like to state the exact portfolio composition at this point, but we would be looking at high quality MNC stocks. For example, we would like to have companies like Grindwel Norton, Clariant Chemicals in our portfolio. We would also look at business opportunity of those companies, growth prospects and potential addition to expand markets and product range. We would prefer stocks that have an ability to generate free cash flows and are attractive on valuations from a 3- to 5-year perspective.

What kind of stocks you will never buy in this fund?
Not only this fund, but as a ground rule we are quite vary of buying stocks with dubious promoter track record. We also stay away from companies which are not high on corporate governance and have tried to shortchange investors in the past. So this rule also applies to our Select Micro Cap fund. Apart from that, we would generally stay away from companies which have high debt exposure and weak balance sheet.

Key reasons why investors should invest in your fund?
Foremost and one of the important parts of this fund is that we are giving high quality portfolio of MNCs that are trading at relatively lower valuations having strong track record and positive outlook for next five years. Secondly, as I said, valuations are very attractive in the mid and small cap space and investors can make decent returns in the years to come. I also believe that investors should invest in equities in general at this point of time because of the improvement seen on India's macro front. Most of India's worries are behind now and economy is on growth path and also synchronised with global growth which is also recovering.

What is your strategy to improve the performance of your equity funds?
First, we have enforced more risk management parameters in terms of stocks and sector overlaps in our different funds. Now there is more alignment on the market cap curve and more alignment on sector and on the stocks across the portfolio. I think it has helped us a lot and is showing positive results. Second, we have also resorted to improve our product portfolio by merging certain similar funds and trying to improve investors' experience with us. We have already merged Sundaram Leadership and Sundaram Growth which will now offer diversification across large cap stocks to the investors. We are also planning to merge our Sundaram Capex Opportunities and Sundaram Energy Opportunities fund to create a more diversified infrastructure fund for the investors which will be also of lower risk. In order to have a deeper stock specific coverage, we have cut our overall investment universe from 600 stocks to 300 stocks and we have also made changes in our team.