DSP BlackRock Small and Mid Cap Fund: Hold

Anticipating a recovery in the country’s economic prospects, DSP BlackRock Small and Mid Cap fund bought into cyclical themes such as financials and construction in early 2013. A delay in the recovery caught the fund on the wrong foot. The late catch-up by the fund, reallocating assets to defensive themes — pharma and IT — by mid 2013, impacted performance during the first nine months of 2013.

However, a relief rally in cyclical themes over the last six months, driven by early signs of recovery and expectation of a favourable political outcome, has had a positive rub-off on the fund. Existing investors can retain their units in the scheme. Fresh exposure need not be considered at present but may be looked at on sustained recovery in the scheme’s performance.

Despite the bottom-of-the pile performance over one- and three-year timeframes, the fund scores well on consistency. In the last five years, its performance has been better than its benchmark — CNX Midcap — nearly 90 per cent of the time.

A systematic monthly investment of ₹1,000 in DSP BlackRock Small and Mid Cap fund over the last five years would have yielded annual returns over 12 per cent. In addition to outpacing its benchmarks during rallies, the fund has successfully contained downside during market falls.

Though it delivered returns higher than the benchmark across all time periods, it has lagged peer funds such as HDFC Midcap Opportunities and Franklin India Smaller Companies.

Given the breadth of options in the mid-cap space, the ability to identify potentially lucrative performers ahead of peers is critical. The category topper HDFC Midcap Opportunities’ skill in catching stocks early helped it steer ahead of the competition. For instance, stocks such as Voltas, Nucleus Software, Aurobindo Pharma and KEC International have more than doubled from the August lows.

DSP BlackRock Small and Mid Cap fund also latched on to a few star performers such as Arvind, NCC, SRF and Voltas. However, the ability to identify such stocks on an ongoing basis will be vital to sustained outperformance.

The scheme held 45 stocks in its portfolio at the end of March 2014 with a weighted average market capitalisation of ₹7,750 crore. The fund has now increased exposure to beaten-down financial and industrial stocks. A recovery in the economy and a stable political environment may help the fund over the next one year.