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At a time when large fund houses are restricting inflows into small-cap funds, Quantum Asset Management Company finds pockets of opportunity in the small-cap space and expects small-cap funds to deliver better returns as the economy grows.
Chirag Mehta, Chief Investment Officer and Fund Manager, Quantum AMC said the biggest challenge in the small-cap mutual fund space today is a large asset under management size.
Funds with large AUM tend to face liquidity issues if they end up owning a big part of a small-cap stock’s market capitalisation and they are compelled to have a long tail of stocks with unsubstantial weights, he said.
“Typically, these large fund houses are forced to either sit on cash or to invest incremental inflows into mid or large-cap names, which is not in line with the objective of small-cap funds,” he added at an event to launch Quantum Small Cap Fund here on Thursday. “We are completely aware of challenges in running small-cap and will not hesitate if the AUM size to an optimal level and it becomes incrementally difficult to build a liquid portfolio of promising small-cap businesses.” he said.
At present, the average time for a small-cap funds to liquidate the asset ranges from 200 days to 1,623 days depending on the fund size while the ideal timeframe should be 66 days for delivering the NAV displayed to investors.
Quantum intends to invest in lesser-known, smaller businesses with growth prospects and investors should benefit over a period of time when these companies increase their revenue and earnings, he said.
With the steady flow into small-cap space, some of the fund houses have a portfolio of 80 stocks as their holding in cream of small-cap companies reach over 8-10 per cent. This becomes counter-productive and drain returns, said Mehta.
Quantum intends to have 25-60 stocks in its portfolio.
IV Subramaniam, Managing Director & Group Head- Equities, Quantum Advisors said many new start-ups have sprung up to solve problems faced by the population and these companies could eventually list as small-cap companies to eventually grow into sizable companies in the mid-cap or large-cap space.
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