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A consistent decline in US bond yields has created a favourable environment for equities, coupled with an improvement in the Indian GDP growth rate, softened inflation due to the decline in crude prices, and positive outcomes for the BJP in the crucial State elections ahead of the national polls next year. These factors have emboldened the bulls, propelling Indian equities to new highs. Small-cap stocks, in particular, have experienced significant growth, with their BSE index rising 43 per cent year to date and achieving a 34 per cent CAGR in the last three years. However, not all boats are lifted equally by this rising tide. Aditya Birla Sun Life (ABSL) Small Cap Fund, rated 1 star (the lowest rank) in our bl.portfolio Star Track MF Ratings, remains a laggard as an actively-managed scheme compared with its category and the benchmark. Hence, investors may consider selling the fund. Here is a detailed explanation.
Performance
ABSL Small Cap Fund (previously a small- and mid-cap fund) transitioned to its new form in May 2018 as part of the SEBI recategorisation exercise. However, the fund’s performance has been lacklustre compared with the small-cap fund category and Nifty Smallcap 250 TRI since then. In terms of full calendar year returns (2019 to 2022) and year-to-date 2023, the ABSL fund has lagged the category average for each period as well as its benchmark (see charts).
In terms of trailing point-to-point returns (up to December 6, 2023), the fund has underperformed actively-managed small-cap funds as well as the benchmark for one-, three-, and five-year periods.
The fund’s SIP returns also lag its category and benchmark (see chart).
Rolling returns exhibit return consistency. Here too, the picture is sub-optimal when we look at ABSL Small Cap Fund in terms of one-year and three-year rolling returns rolled daily over the last five years (December 6, 2018, to December 6, 2023) compared with 15 other peers with a five-year NAV history and Nifty Smallcap 250 TRI. While the situation may change in the future, there is no guarantee.
The fund’s rolling returns distribution versus small-cap fund category average also highlights its higher variability and lower consistency. (see chart).
Absolute returns often tell only one side of the story. The Sharpe ratio, which measures how much return an investor gets in correlation to the level of risk being exposed to, is crucial. The Sharpe ratio of ABSL Small Cap Fund in the last one year (0.14) and three years (0.37) falls below the average of 15 peer schemes for the same periods (0.15 and 0.49, respectively).
One reason the ABSL fund has not performed as well as its category is possibly the relative underperformance of its bets in bullish and bearish phases. For instance, according to ACEMF data, the fund has outperformed its benchmark 84 per cent during periods of positive returns in the last three-year period vs. the category average of 87 per cent. Similarly, though the fund has lost less than its benchmark during periods of negative returns for the benchmark, it hasn’t fared as well as its category average.
Given the fund’s uninspiring performance, its direct plan fees (total expense ratio) of 76 basis points place it in the second quintile among 24 peers analysed. This is also slightly more expensive than the category average of 64 basis points.
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While the relative returns of ABSL Small Cap Fund haven’t been inspiring, its current portfolio isn’t necessarily poor. Also, the fund trades less frequently than many in its peer group. Sectorally, the fund’s most preferred ones are finance, consumer durables, banks, software, electrical equipment, real estate, auto components, and textiles & apparels. The fund currently appears overweight on BFSI and consumer cyclicals, while it appears underweight in basic materials and industrials. The fund’s managers changed more than a year ago.
ABSL Small Cap maintains a very diversified portfolio with over 100 stocks. Its top-10 current holdings are Cholamandalam Financial, JK Cement, Go Fashion, Hitachi Energy, Federal Bank, Star Health, TD Power, Gokaldas Exports, Campus Activewear, and Sanofi India. In terms of overall portfolio best performers, positions in Cholamandalam, Hitachi, Birlasoft, RateGain, Brigade, Craftsman Automation Ltd, etc, have worked well in the last one year. However, returns from stocks such as JK Cement, Go Fashion, Federal Bank, Campus Activewear, Prince Pipes, and VIP Industries, etc, have not been as good as the broader small-cap index.
The fund has a hint of value-investing bias, which may be holding back its performance. According to ACEMF data, ABSL Small Cap’s portfolio P/E (41 times) is lower than 15 peers (42-51 times). Though value investing works well, in India, the small-cap space is a value investing minefield. Small-caps that trade cheap are often those bogged down by governance or business risks. Hence, going for high P/E stocks may not necessarily be a bad strategy.
If you are looking for promising actively-managed small-cap funds, consider top-rated offerings such as Nippon India Small Cap, Quant Small Cap and SBI Small Cap.
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