The Hindu Business Line : `Stay invested to reap rewards in small, mid-cap stocks'

Birla Sun Life Mutual Fund has recently rolled out Birla Sun Life Long Term Advantage Fund-Series I. The fund, a three-year closed end product, has a focus on small and mid-cap stocks. Mr A. Balasubramaniam, CIO of the fund house, spoke to Business Line on the rationale for the fund launch:

Birla Sun Life already manages the open-end Birla Midcap Fund, which has a good long-term performance record. What then, is the rationale for a new closed-end fund with a small- and mid-cap focus?

We don't have a closed-end fund in the mid-cap category. In the case of small- and mid-cap stocks, we have found that unless you hold the stock for an extended period, you don't reap the benefits of company performance. In open-end funds, factors such as inflows, outflows and peer group performance do dictate investment decisions. In an open-end fund you may see value in a stock, but may not buy it because of short-term performance pressures.

To cite a few examples, companies such as Subex and Sundaram Clayton have delivered strong financial performance over a two-three year period, but their stock prices have not delivered good returns over the short-term. In several cases, we have noticed in our existing Midcap Fund that smaller companies, if held for a three-year period, can deliver better performance than large-cap stocks. You are free of such pressures in a closed-end fund. What is more, Birla Midcap Fund has the provision to invest up to 35 per cent of its portfolio in large-caps. Therefore, in that fund, we tend to hold mid-cap stocks that migrate into large-caps. In the Long Term Advantage Fund, we would like to stay only with small and mid-cap stocks, and hold them for the longer term.

What is the market capitalisation range that this fund will invest in?

We will be adopting the CNX definitions for mid-cap and small stocks. Based on this definition, mid-cap stocks that we will invest in can have a market cap of anywhere between Rs 800 crore and Rs 10,000 crore. The small-cap portion can be invested in stocks with a market cap of up to Rs 800 crore.

There is generally the view that rising interest rates impact small- and mid-cap stocks much more than large caps. That being the case, is this the right time to invest in them?

I feel that companies that deliver good financial performance, despite rising interest rates will definitely be sought after in the stock markets. I think that companies in rate-sensitive sectors, whether in the large-cap segment or among the small- and mid-cap segment, will be hit. FMCG companies or pharmaceutical companies that are not affected by interest rates will find favour.

Our challenge is to find companies across sectors and market caps that are not impacted by rising interest rates. If you ask me whether I will buy a construction or a real estate company today, I may not. We do not know the extent to which these companies will be impacted by interest rate increases.

Given the substantial valuation gap between mid and large cap stocks, I believe we will continue to find opportunities in the mid-cap space. However, you need considerable patience while investing in such stocks and should stay invested to reap the rewards.

Do you see the possibility of a further de-rating of mid-cap stocks because of risk aversion on the part of investors?

The valuation compression has already happened and we do not see further risks. We have done a study on small and mid-cap stocks and have found that their P/E multiples are at a discount of anywhere between three and 45 per cent to the large-caps, depending on the sector to which they belong. That is why we feel there cannot be a better time to invest.

Aarati Krishnan

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