Aditya Birla Sun Life Small Cap: A good choice to withstand small-cap volatility

With the small-cap indices taking a heavy knock over the past year, several stocks in the segment now trade at attractive levels, especially given their fundamentals. Investors looking for above-average returns with moderate levels of risk can consider buying the units of Aditya Birla Sun Life Small Cap.

By taking a non-concentrated approach to stock and sector selection, and taking cash (and debt) calls during periods of market correction, the fund has managed to withstand the volatility that is inherent to the small-cap segment. ABSL Small Cap also takes a value-oriented approach to its portfolio and does not always get into momentum plays.

Over one-, three- and five-year periods, the scheme has outperformed its benchmark — Nifty Smallcap 100 TRI — by 2.5-5 percentage points. In the past five years, the fund has delivered a compounded annual return of 20.2 per cent. It has also delivered better returns than peers such as Kotak Small Cap and HSBC Small Cap Equity.

Given that it is a small-cap fund, investors would be better off taking the SIP (systematic investment plan) route to buying units of the scheme so as to average costs and ride out market volatility. Though not a chart topper, the scheme can be a good diversifier in the portfolio of an investor with a horizon of at least 5-7 years.

Portfolio and strategy

ABSL Small Cap takes a fairly cautious approach to portfolio construction. Individual stocks constitute less than 4 per cent of the portfolio. Apart from financial services, no other segment accounts for even 10 per cent of the fund’s holdings.

The fund holds more than 55 stocks at any point in time, making it quite diversified and relatively less risky.

Also, the scheme takes cash and debt positions to the tune of 7-15 per cent of the portfolio during choppy markets, which ensures that the scheme contains downsides well.

A couple of years ago, pharma, consumer non-durable and software were among the top sectors held, apart from banks and financials. As some of these stocks rallied and valuations soared, ABSL Small Cap trimmed exposures. In recent months, the fund has upped stakes in beaten-down segments such as auto ancillaries, capital goods and non-banking companies.

The top holdings of the fund include DCB Bank, PNC Infratech, Mahindra CIE Automotive, Cyient, IRB Infrastructure Developers and Inox Leisure.

There is a distinct thrust on road infrastructure players that are relatively well-placed on the execution and financial closure fronts.

The focus has tended to buying into stocks with significant valuation comfort rather than pure momentum plays.