Sunil Singhania, fund manager of Reliance Small Cap, says that their strong research capabilities are a differentiator while investing in the under-researched and often opaque universe of small cap stocks.
The fund is among the top performers in the small-cap category over three and five years. What has led to this outperformance?
The superior performance of our mid- and small-cap funds can be attributed to our internal research capabilities. We have one of the largest equity-fund management and research teams in the industry and track over 200 companies in house. Given the unique characteristics of the small-cap space like low coverage, lower transparency, large universe etc., in house research capabilities are a clear differentiator.
In line with our investment philosophy of long-term wealth creation, we invest in 'businesses' and not stocks and are empowered by the strong internal research capabilities to invest in the differentiated ideas which can deliver over the long run.
The fund has also contained downside well in the last one year. How have you managed this?
As explained previously, while investing in small companies', in-house research becomes very critical. That is where our well-experienced 35-member equity team becomes a big asset. Having a clear focus, taking long-term fundamental calls and investing with the mindset of owning a part of the business rather than a stock has played out well.
What kind of stocks enter your portfolio? What kind of stocks never do?
We avoid companies with fractured balance sheets, poor-quality managements, high valuations without strong fundamentals, low growth visibility, etc.
When do you decide to sell a stock?
We follow a buy-and-hold strategy and by its very nature, small-cap investments should be long-term-focused. Investments in smaller companies are made with the thought of these businesses scaling up faster over the next few years. Thus investments continue to be in the portfolio as long as they are growing as per expectations and do not disappoint consistently.
Since small-cap funds are vulnerable to volatility, how do you manage volatility in this fund?
We maintain a well-diversified portfolio across stocks and sectors. Investments in a single stock usually does not exceed 4 to 5 per cent at the time of investment, and not more than 20 per cent of the portfolio is allocated to a single sector. Further, given the unique characteristics of small-cap investments, we are not averse to actively using cash in times of extreme valuations or lack of adequate investment opportunities. However, this cash position will be always within the maximum limits specified in the scheme-information document.
All these measures have helped the fund to negotiate volatile periods and outperform over the long run.
How have you positioned your portfolio for the future?
The portfolio is well-positioned to gain meaningfully from the expected domestic growth revival. The fund has an optimal mix of economic-recovery themes like domestic consumption and beneficiaries of policy actions, along with thematic plays (new/emerging trends which can scale up) and value investments - companies which are available at a significant discount to core value on non-fundamental reasons.
Thus, the portfolio offers a prudent blend of high-growth cyclical and secular themes and is well-poised to generate superior performance over the medium to long term.
This interview appeared in the May 2016 Issue of Mutual Fund Insight.
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