Fund manager Samir Rachh manages the country's largest small-cap scheme: Nippon India Small Cap.
His fund has beaten the index and most of the peers, and delivered better risk-adjusted returns, which is a key reason for Rachh winning the Business Standard Fund Manager of the Year award in the Mid and Small-Cap Equity category.
No small feat considering the fund had assets of over Rs 17,000 crore/Rs 170 billion (as of September 2021; average one-year assets of Rs 13,255 crore/Rs 132.55 billion), a size which could put limitations on running a concentrated portfolio.
The fund returned 92.4 per cent for the year ended September 30, 2021, beating its benchmark IISL Nifty Smallcap 250 TR INR by more than 3 percentage points (over 300 basis points).
Rachh says stocks in sectors such as chemicals, IT, consumer durables and capital goods have contributed to the fund's outperformance.
His top five picks by way of assets include Deepak Nitrite (3.4 per cent), Tube Investments of India (2.7 per cent), Birla Corporation (2.5 per cent), Radico Khaitan (2.1 per cent) and Bajaj Electricals (1.9 per cent).
"We consciously try to create a portfolio that is well diversified across sectors, across investment styles and across themes. A diversified portfolio also gives us the ability to hold stock for the long term. It helps because when some of our top-performing stocks or sectors go through corrections, other stocks or sectors take over and give stability to the portfolio, which in turn gives us the ability to hold some winners for a long period of time," says Rachh who follows a bottom-up approach while scouting for good businesses, run by good management that are available at a reasonable price.
The fund currently has 5 per cent invested in giant-cap companies, another 5 per cent in large-cap companies, 41 per cent in mid-caps, 48 per cent in small-caps and 0.5 per cent in tiny-caps.
Top 10 stocks form about 22 per cent of the portfolio.
The fund has a high proportion of money in engineering and FMCG stocks.
Rachh is betting on a revival in the capex cycle aided by the government's spending on infra, "China plus one" policy, low cost of funds and good corporate balance sheet. "Consumption is a good theme and some of our FMCG names are poised to see reasonable growth," says Rachh.
Small-cap funds by nature are thought to be riskier -- be it volatility, liquidity or stock-specific risk.
Rachh says the fund manages these risks by maintaining a diversified portfolio and restricting the weighting in any single stock to not more than 3 per cent at the time of buying.
It avoids companies in cyclical businesses with poor business dynamics, those with excessive reliance on government or with managements that treat minority shareholders unfairly.
"We never go overboard on any stock, no matter how good it may seem. We rely on extensive channel checks and feedback from dealers and distributors, while researching our picks," Rachh says.
The fund follows a buy and hold strategy as far as possible.
Exits are determined by change in a company's fundamentals, governance issues and steep valuations resulting in unfavourable risk-return scenarios.
For example, the commodity cycle dictates exits in stocks in that sector.
How does he navigate the size constraints?
Rachh insists size is not a problem for now as there are more than 600 small-cap companies with a market cap of between Rs 1,000 crore (Rs 10 billion) and Rs 15,000 crore (Rs 150 billion), and a constant supply of newer companies.
"Small-cap is essentially a product for long-term investors with a 7- to 8-year horizon. We are quite fine running a diversified strategy, as we feel in small-caps, diversification works to the advantage of investors due to reasons explained earlier," he says.
According to him, the bulk of inflows is through the systematic investment plan route, which gives him ample time to deploy the money.
The fund also has the option of temporarily restricting lump-sum flows if deployment becomes a challenge.
Rachh believes the economy is on a strong growth trajectory and that augurs well for corporate earnings.
"Inflation is the single biggest factor that could have a bearing on growth rates, interest rates as well as valuations. Oil prices also need to be watched closely," he says.
Feature Presentation: Aslam Hunani/Rediff.com