Harshad Patwardhan, Fund Manager of the newly launched Edelweiss Small Cap Fund, talks exclusively to Paisabazaar regarding this scheme which has a unique ‘STeP feature’. This STeP feature, about which you can read here, invests your money in the fund in 5 monthly instalment taking into consideration the movements in the small cap index. In this interview, we get his views on the fund and small cap space in general.
Q. What would you say are the top 3 reasons for investors to invest in this fund?
Ans – This is a particularly good time to begin investing in the small and mid cap category, firstly because last year i.e. 2018 has seen relatively bad for small cap and mid cap stocks versus large caps. And typically history tells us that there is usually a nice bounce back after a particularly bad year. So, timing wise this is a good time to look at this segment. Secondly, we have experience running a very successful mid cap strategy and in terms of content, I would say that mid cap and small cap strategies are more or less the same. It is basically trying to identify relatively under-researched and underrated stocks and we have a successful record in 10 years of running. Thirdly, because we are very conscious about constructing portfolios with liquidity as an important factor, which I think is a very important in the small and mid cap space. There are many funds in the small cap space today which we believe are a little larger which leads to illiquid pockets in these funds and we are extremely conscious of that risk. We have not included any large cap stock in this fund, so the investors will get full exposure to the small caps.
Q. What is your view on valuations in the small cap space?
Ans – Valuations in the small and mid cap space corrected quite significantly through 2018. Infact, the last year was the worst year for the large caps and small caps. Companies which deserved to be punished got punished last year when the stock prices were falling but the companies which did not deserve to get punished, for instance where fundamentals remained intact or improved, saw corrections.
Q. Many existing small cap funds have become hobbled by their large size. Do you consider size to be a problem? If so, how big can a small cap fund become without affecting its performance?
Ans – I believe the size of a small cap fund cannot be generalised because the most concerning factor in that is the most illiquid stock in the portfolio. The way to test it is, let’s say, there is a 5% deduction in a fund in a month, so we need to see whether the fund manager is able to sell 5% of each of the stock proportionately, because ultimately the portfolio composition should remain the same for the investors to not leave, otherwise the portfolio quality will change. So, that is the way to get the idea about the correct composition of the fund.
Q. Continuing with the question of size, does a large size compel small cap funds to become over-diversified?
Ans – Well, that is possible. But more often what I have observed is fairly concentrated portfolios. While some people try to over-diversify, some let the illiquidity slip in. So, people are going both ways.
Q. The year 2019 is an election year and hence likely to have a lot of volatility. Are small caps a safe space for investors in such times?
Ans – Volatility is in the very nature of the market. And we can expect the same during 2019.
Q. What specific sectors are you bullish on and which ones would you completely avoid?
Ans – Well, I would say they are never any sectors which we avoid completely at all times. We have a diversified portfolio and it will keeping changing depending on the content. However, at this point of time, we are bullish on the industrial, specialty chemical, consumer goods and financial sectors.