DSP BlackRock Micro Cap Fund (now DSP BlackRock Small Cap) was a darling among investors with a star fund manager. Anyone who bought into the fund five years ago would have seen their money compound by 30% per annum. Investors were so eager to pile into it that the fund had to shut its gates to fresh inflows in February 2017.
Those gates still remain shut even as the fund’s performance has hit the rails. One year returns are -7.72% with most of the contraction coming in the last six months. In that period, the fund’s NAV fell by a whopping 21%. Investors pulled out almost a thousand crore from the fund over in the first five months of 2018. The fund’s average monthly Assets under Management (AUM) fell from Rs 6,916 crore in January 2018 to Rs 5,950 crore in May 2018.
The fund owns 89 stocks with the top 10 stocks accounting for just 30% of the portfolio. It is difficult to attribute the fund’s problems to a few bad bets. The SEBI recategorisation exercise has not had changed the fund mandate dramatically. It was earlier focused on investing in companies below the top 300 by market cap. This has now changed to companies below the top 250 where it must invest 65% of its portfolio. This has given it the opportunity to move into slightly larger companies.
Why might this be happening?
The risk is inherent to equity investing, especially small cap investing. However, there are a few factors peculiar to DSP BlackRock Small Cap and the AMC. First, the fund has grown to a humongous size which may make it difficult for the fund to perform in the small cap space. Large funds tend to encounter liquidity constraints when they invest in a small company – the market simply isn’t deep enough to provide enough buyers or sellers on the other side. They also run out of opportunities, they can’t spot any more good stocks in the small cap space. The fund itself seems to have recognized this when it stopped taking fresh inflows in February 2017. However, the question is, was this done too late? Was the fund already too big to deliver?
Second, the AMC’s Chief Investment Officer (CIO) Anup Maheshwari quit in April 2018. In May 2018, it was announced that BlackRock Inc (the global partner) would part ways with DSP. The AMC will shortly become DSP Mutual Fund instead of DSP BlackRock Mutual Fund. Vinit Sambre, the fund manager of DSP BlackRock Small Cap was promoted to become co-head of equities for the entire AMC. Is all this disruption taking a toll on performance?
It is too early to conclude anything about the scheme especially one so successful over the last five and even 10 years. However, the signs are not very positive. Investors should not rush in when the fund reopens to fresh investment. Star funds tend to ‘mean revert’ (get pulled to the average) over time because no fund manager can beat the market forever. DSP BlackRock Small Cap was an above average by a huge margin for a very long time. A mean reversion would entail a major move on the other side.