HDFC Small Cap Fund – The missing track record

MARCH 23, 2018

Credits: HDFC Small Cap Fund – The missing track record by VIPIN KHANDELWAL

Does HDFC Small Cap fund deserve your money? You already have large caps in the portfolio, so are multi caps and mid caps. How about adding a small cap fund? That’s what an investor is asking.

I’m planning to invest in this fund for my small cap portion. Both DSP BR Small Cap (previously DSP BR Micro Cap) and SBI Small Cap aren’t accepting subscriptions as you well know. And Reliance Small Cap’s AUM is too big for my liking (but do let me know if you think this isn’t an issue as I really like the performance and expense ratio of this fund). Sundaram SMILE, well, you aren’t in favour of this one as per your small cap funds review, and I’d definitely not invest in this as I’m already investing in their midcap fund.

HDFC Small Cap fund seems to be managed by a good fund manager. Its AUM isn’t too big. Expense ratio is good. Returns aren’t spectacular compared to its peers, but it’s not bad. Bear market downside protection wasn’t bad. And it uses a proper benchmark, unlike Franklin India Smaller Companies fund. But I’d like to know if you think this is not a good decision, or if you think I can go ahead. This fund wasn’t covered in the Unovest Blog smallcap review, hence my question.

For the retail investor focused on wealth creation, specially via direct stocks, small and micro caps is the most attractive zone. The large caps are done and dusted, the mid caps are covered enough too. It is only the small and micro caps where the “hidden gems and treasures” await.

Now, picking a stock directly is not so easy. So we outsource the job to a manager of a mutual fund – more specifically a small cap fund.

The small cap fund variety has had a charm of its own and it is not an easy one to ignore. There are years when the funds post 100% returns. Yes, in a single year. There are also years, when they fall 50% in a matter of months. But the fall doesn’t seem to matter so much – the rewards are eye popping.

That is where our dear investor too is heading with his own detailed analysis to select a small cap fund.

But just hold on!

Source: Unovest, NAV data as on March 22, 2018. Factsheet data for direct plans as on Feb 28, 2018.

As you can see, the funds have a remarkable performance streak.

I understand it can be very tempting to have the only (relatively) high performing, low AUM, low expense, small cap fund in the portfolio. HDFC Small cap fund does stand out in a lot of ways.

Yet, there is one thing that is missing in it – the track record!

HDFC Small Cap Fund – a brief history

HDFC Small cap is a recent entrant to the HDFC MF stable. The fund was started in April 2008 by Morgan Stanley as the Morgan Stanley ACE Fund – a multi cap fund.

In 2014, when HDFC acquired Morgan Stanley’s 8 schemes, this too came in. The ACE fund was repositioned as HDFC Small & Mid Cap fund with a focus on small and mid cap stocks.

However, HDFC probably realised that this was working against its own HDFC Mid cap Opportunities fund and once again in November 2016 renamed it as HDFC Small Cap fund with a focus on Small cap stocks.

The fund now has a mandate to hold a minimum of 80% of its money in small caps.

(source)

So, if you understand it, the fund in its current avatar of a pure small cap fund is just a little over an year old.

How is that for a track record?

Not sure about you, but for me this one doesn’t have enough of its own.

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Let’s talk about the size issue.

The investor understands the downsides of a large size in a small cap fund. Too big a size can work against the fund. However, this one doesn’t seem to be so large yet.

Here’s a perspective. The overall universe of stocks and opportunities available in the market are the same for every fund scheme. Now, when there are a dozen funds, which have grown big in size over the past couple of years and chasing the same limited quality universe of small cap stocks, what is going to happen?

A mad race where the managers are likely to overpay for any fresh purchases.

Hence, I respect the decision of some of the fund houses to close the doors. Others are just riding the greed of the investors to make more money. Who will end up making money is anybody’s guess.

HDFC Small cap Fund – Size growth

The fund was just about Rs. 927 crores in November 2016, when it last changed its positioning. Today, it stands at approx. Rs. 2700 crores. Almost 3 times in 15 months.

I am sometimes amazed, if this was a stock, I would be so happy to buy it.

But for a mutual fund scheme which plans to invest in small cap stocks…..the question remains.

What about other ratios and ratings?

Frankly, you can throw out all ratings, ratios and performance statistics of the HDFC Small Cap fund out of the window.

The fund has a lot to see and prove before we can call it a track record. The ratios come in only after that.

What is your view on this fund? Do share in the comments.

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