The Hindu Business Line : Sundaram BNP Paribas SMILE Fund: Hold

The fund’s one-year returns, at about 38 per cent, are well ahead of its benchmark as well as the category average for diversified equity funds, amidst a challenging period for equity funds in general. But its two-year record shows it trailing its benchmark as well as the Nifty.

Though the fund’s name (Small and Medium Indian Leading Equities or S.M.I.L.E) suggests a complete small & mid-cap stock bias, the fund, in practice, functions as a multi-cap fund with exposures across the market capitalisation range.

Though it invests across the market cap range, one feature that distinguishes this fund from ‘flexicap’ or “opportunities” funds is that Sundaram SMILE has consistently maintained a sizeable allocation to mid- and small cap stocks in its portfolio.

Suitability: As a fund that takes sizeable exposure in both mid and small-cap stocks, investors in Sundaram BNP SMILE should brace for considerable volatility of returns as well as downside risks in the event of a correction.

A three-five-year horizon may be essential with this fund. The market meltdown since January this year has amply highlighted the downside risks and impact costs that mid and small-cap stocks carry, despite their return potential.

The Sundaram BNP SMILE fund lost 37 per cent of its peak NAV between January 8 and March 18 this year, a period when the Nifty had 28 per cent shaved off its value. The fund has managed to contain declines to levels lower than the mid & small-cap indices due to its large-cap exposures.

Portfolio & performance: The fund has managed a one-year return of about 38 per cent, with annualised returns since inception standing at 32 per cent. The latter just about matches the category average for diversified equity funds.

Over the past year, the fund has maintained almost a 50:50 mix between large cap stocks on one hand, and mid- and small-caps on another. It has held on to these allocations even over the past four months, when mid-cap stock prices have corrected sharply. The one key change that the fund has made to its overall allocations over the past four months is its shift in preference from small-cap to mid-cap stocks.

Stocks with a market cap of Rs 2,500 crore or less accounted for 27 per cent of its assets in December 2007; this was trimmed to 16 per cent by end-April 2008. This switch may enable the fund to contain volatility better.

The corrective phase that began in January 2008 has opened up a wide valuation gap between large-cap stocks and the mid and small-caps. Present valuations for several mid and small-cap stocks do offer an attractive entry point for long-term investors. Sundaram SMILE fund appears to have taken advantage of this opportunity to undertake a thorough overhaul of its portfolio. As many as 28 stocks have made an entry into the fund’s 60-stock portfolio in these four months, while 31 stocks have exited. The fund appears to have used the market turmoil over the past quarter to add to key exposures in large-caps L&T, Infosys and HDFC Bank.

Fund facts: The NAV of the growth option is Rs 24.9. Mr Krishna Kumar manages the fund.

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