Mutual Funds

UTI Small Cap NFO: In search of sustainable small-caps

Yoganand D BL Research Bureau | Updated on December 12, 2020 Published on December 12, 2020

The open-ended equity scheme will predominantly invest in high- and consistent-growth companies

While many asset management companies (AMCs) are launching new funds with international diversification or specific themes, UTI AMC has come out with a traditional equity scheme focussed on small-cap stocks — UTI Small Cap Fund.

Large-cap stocks have been scaling new highs while mid- and small-cap ones have been playing catch up and have come into the limelight in recent times.

Following a lacklustre performance in 2019 and early 2020, the S&P BSE SmallCap Index has been on a strong run since bottoming out in late March this year. Over the past six months and one year, the index has surged 48 per cent and 32 per cent, respectively, while The S&P BSE Sensex and the Nifty 50 have each gained around 35 per cent over the past six months.

In the last one year, the bellwether indices have advanced around 13.5 per cent each.

Valuation-wise, small-cap stocks are still at a comfortable level. At 2.20 times, the trailing P/B multiple of the Nifty Smallcap 250 Index is close to the long-term average of 1.98 times, indicating scope for growth expansion.

Based on the Price to Book Value (P/B) multiple, the index was expensive in 2017 and cheap in March 2020.

Also, based on three- and five-year rolling returns for the Nifty 100 TRI and the Nifty Smallcap 250 TRI, the gap between large-caps and small-caps looks favourable, indicating potential for sharp revival in small-cap stocks.

 

Small-cap fund performance

Over the past one year, the small-cap fund category has delivered an average return of 27.8 per cent, outperforming the S&P BSE 250 SmallCap TRI return of 25 per cent. In the long term, say over five- and seven-year periods, small-cap funds have delivered an average return of 10 per cent and 19 per cent, respectively, outpacing the S&P BSE 250 SmallCap TRI returns of 7.6 per cent and 13 per cent.

UTI Small Cap is an open-ended equity scheme that will predominantly invest in high- and consistent-growth small-cap companies with sustainable business models. The NFO opened on December 2 and closes on December 16, and will re-open for subscription.. The fund is managed by Ankit Agarwal.

Strategy

The allocation to small-caps will be 65-80 per cent and that to mid-caps will be 20-35 per cent of the equity portfolio.

The fund will follow a bottom-up approach for stock selection and the key selection criteria will be business scalability, a turnaround strategy and transformational change that has the potential to re-rate the company.

The fund house will also adopt well-established risk management practices. For instance, it has internal limits — such as single-sector allocation should be lower of 35 per cent or benchmark plus 12 per cent. The top five sectors that could be part of the portfolio are consumer goods with a weightage of 18 per cent, financial services (13 per cent), construction (10 per cent), industrial manufacturing (9 per cent) and chemicals (8 per cent).

Given that there are many existing small-cap funds, investors can wait and watch the performance of this new fund before investing.

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Published on December 12, 2020
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