With markets making new highs in November, mutual funds have started launching new schemes with gusto. UTI Small Cap Fund is set to launch today (2nd December). The fund will be managed by Ankit Agarwal, the fund manager of UTI Midcap Fund. According to data from Value Research, UTI Midcap under performed the S&P BSE Midcap 150 over the past 3 and 5 years. However, to be fair to Agarwal, the fund has outperformed since he took over the reins in August 2019.
Much of the revival has come from a shift in the fund’s strategy from value to growth investing, a strategy that Agarwal is likely to implement in the small cap fund as well. Traditional value investing seeks to buy companies that are priced cheaply compared with metrics such as earnings or book value, but this philosophy has struggled against growth investing (buying fast growing but more expensively valued companies) for several years.
With other small cap funds such as SBI Small Cap closing themselves for lump sum subscription, there is a strong element of doubt about whether this is the right time to invest in a small cap fund. SBI MF continues to accept SIP (systematic investment plan) flows up to Rs.5,000 in the scheme.
According to the UTI MF presentation, the price to book ratio of the Nifty Small Cap 250 Index at 2.20 is close to its long run average of 1.98 and the dividend yield at 1.76% is a little higher than the long term average of 1.61%. Experts typically look at market capitalization as a more accurate long term measure of valuation. Here the answer is inconclusive. The small cap share in the Nifty 500 is at 6%. It is not as large as the 8% seen in October 2017 but not as cheap as it was in October 2013 at 4%.
According to the UTI MF presentation, the fund will maintain a roughly 65-80% allocation to small caps, with the rest in mid caps. Although small cap funds can invest up to 35% of their corpus in large cap companies also, this will not be the strategy of UTI Small Cap, said Agarwal.
It will aim to hold a portfolio of 60-70 stocks so that it can be scaled up without having to change the portfolio, he added. The strategy is a bottom-up one and so there will be no predetermined sectoral allocations. However the model portfolio put out by UTI MF in its presentation shows consumer goods as the top sector followed by financial services.
“A low interest rate environment disproportionately benefits mid and small cap companies. These tend to have a higher cost of capital than large caps. If you notice the returns over the past few years have been led by expansion in multiples. However in the coming years we expect earnings growth to take charge,” said Agarwal.