Edelweiss Mutual Fund has launched a small cap fund, whose NFO is now available for subscription. This fund has introduced a unique facility called Smart Trigger enabled Plan (STeP) which allows investors to stagger their investment over a period of four months (see our review of the fund here). Small cap stocks have seen some serious correction last year and market seems to be turning in favour of Small cap & Mid cap portfolios again. We spoke to Radhika Gupta, CEO, Edelweiss Asset Management Company, to get her perspective on equity markets and small cap fund as an option for retail investors.
Gupta has been at the helm of Edelweiss AMC since February 1, 2017. Prior to this, Gupta headed Edelweiss Multi Strategy Funds Management Pvt. Ltd and was responsible for setting the strategic direction, overseeing investments, sales and distribution. Prior to joining the firm in 2014, she was a part of the global asset allocation team at AQR Capital Management as Portfolio Manager, where she garnered her investment experience spanning over developed and emerging equities and fixed income securities, from 2006 to 2009. Gupta started her career at McKinsey & Company as a Business Analyst from 2005 to 2006. She was one of the Co-Founders at Forefront Capital Management Pvt. Ltd. Excerpts from the interview:
What is your outlook on Indian economy and equity markets in India?
As one of the world’s fastest-growing economies, Indian economy continues to look favourable. With earnings picking up, India’s consumption story remains intact; hence market outlook over 3-5 years looks strong. Market volatility due to impending elections may continue, though this will give investors an opportunity to invest through staggered manner over 6 months.
What are the key risks in your view?
In my view, these are the risks that could have an impact in the market: Escalation of trade war, protectionist policies by developed countries, volatility in crude oil prices and higher than expected rate hikes by US Fed.
Edelweiss AMC’s small cap fund is available for subscription. What is the strategy for initial deployment of funds in the portfolio considering that there is going to be significant incremental money to be deployed in the next four months on account of STEP facility?
Initial funds generated after the allotment will be deployed immediately. Considering the infusion of incremental money due to STeP facility over a period of four months, will also be deployed immediately. No cash calls in any of our equity funds is encouraged and hence, a similar approach will be followed here.
Considering that Small cap funds are for five to seven year time horizon, does the staggered investment through STEP facility over four months make a material difference in the long run?
Through STeP approach we’re not only staggering investments, but also investing at every market dip i.e. each instalment is triggered at 3% fall in Small Cap Index. Technically speaking, we’re trying to capture 12% fall in a staggered way. Considering one is investing at 12% fall, he is ought to make reasonably better returns in the long run.
In addition, STeP facility also acts as a behaviour nudge for investors to invest and not hesitate from market volatility.
What is your in-house capabilities on Small cap stock research? Do you have specialists specifically covering Small caps?
We’ve a dedicated team of research analysts, fund managers and associates especially tracking stocks in the small and mid-cap space. The team tracks over 200 stocks monitoring their every move.
From an earnings recovery perspective when do you see small caps reporting double digit earnings growth?
Quality small cap stocks are already generating healthy earnings growth. Around 20-30% correction has happened due to which valuations are now looking attractive. Hence looking at the prospects in the small-cap space, we’re launching a small cap fund to take advantage of such stocks.
What is your deployment strategy for the satellite part of the fund? Is it going to be in large caps and mid caps or in fixed income considering that 2019 is expected to be a flat year for equities?
We’re True To Label organisation and hence will stick to our commitment. Out of 100%, 65% of stock selection will be small cap sector and remaining 35% will be from the mid cap space. The fund will avoid any exposure in the large cap space.
Small cap funds are supposed to carry very high risk. As an investment expert what is your advice for investors coming into such funds?
Though small cap stocks are volatile, past history of global markets including India have proved that small caps have out-performed large caps in the long run. Hence investors are advised some exposure to small cap funds, however, with longer investment horizon.
Please provide 5 key reasons why investors should invest in Edelweiss Small Cap Fund.
- Investing in small caps has been rewarding when last one year returns are negative.
- Many quality small caps stocks are down over 30% from their peak and are still generating strong earnings.
- Quality small caps outperform as they show stronger earnings growth compared to large-caps
- Out of 870 stocks in BSE small caps index, more than 400 stocks are covered by less than five analysts thus providing edge to fund manager in generating alpha
- We believe our experience and innovative ideas accessible in bottom-up stock picking will help identify opportunities in the small cap segment for our customers through this fund
- With the launch of this fund, we have integrated a unique feature – STeP, which will allow investors to responsibly invest in the fund in a staggered manner
From an asset allocation point of view, how should investors plan their investments in the coming year? How much should one allocate to small caps?
Asset allocation depends on one’s risk profile. It is advisable to consult your financial adviser since every individual has a different risk bearing capacity. Having said that, a person with reasonable risk appetite should invest 15-20% of his portfolio in small-cap with time horizon of 5 to 7 years.
Disclaimer: Radhika Gupta is the Chief Executive Officer of Edelweiss Asset Management Limited (EAML). The views expressed above are her own. Investors are requested to consult their financial advisors before taking an investment decision.