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How Sundaram’s small, midcap funds beat the mkt hollow

As the bull market gathers pace, the broader market has been outperforming the frontline indices over the past few years. In fact, over the past 12 months, the BSE Mid and Small Cap indices have rallied 58.7 and 51.5 percent, compared to 28.3 percent for the Sensex.

Some funds, however, have even outperformed the broad indices. Sundaram AMC’s S.M.I.L.E. (a small cap fund) and Select Midcap have delivered 106.2 percent and 73.7 percent, respectively, over the past 12 months.

In an interview with CNBC-TV18’s Menaka Doshi and Anuj Singhal, the firm’s CIO – Equity, S Krishna Kumar, discussed his fund’s performance and strategy and his outlook on markets and various sectors going forward.

Excerpts from the interview. Please watch video for the full interview.

Menaka: Could you very briefly articulate what is your investment strategy is in smallcaps that have helped you do 100 percent versus a 50 percent gain on this smallcap Index in the last year?

A: As you are aware Sundaram Mutual Fund focus on the market cap segment below Rs 5,000 crore. This is a very attractive space where there is a lot of growth potential that existed and where also the valuations were which are known badly as a start of this bull market. So a positioning on the market cap curve on sectors which were benefiting from an economic revival helped this fund to do as well as they did last year. Broadly over the many years the strategy has been to build a portfolio of 45-50 stocks, more bottom up, look at real visible growth opportunities in the corporate space, be sector agnostic and be more focused on 3 to 5 years outlook on these companies.

This we have been able to do it because of the strong focused internal research team which goes beyond the sale side research but works on meeting more companies directly and building lot of conviction on stock ideas and growth outlook for the various companies that we have invested. So this gives us ability to identify stocks which are quite small in terms of size but have potential to exhibit significant and steady growth.

Menaka: Is it a sectoral allocation so you have given weightage to certain sectors and they are predominant in your portfolio if I may ask that question because that is not evident from your top ten picks. There are fairly diversified set of stocks in your top ten picks?

A: Sector weights are resultant of the stock selection that we do. So, as I told you the portfolios and absolute return products in that sense we look at stocks from a growth perspective and it is more bottom up in terms of stock selection. So, whatever stocks that pass the filter in terms of the growth potential and the valuations and suit our style of investment and hence we do not look at per se sectoral rates in creating a portfolio.

Menaka: You mentioned valuation and I just want to put a question on how you sort of view the rise we have seen in small cap stocks over the last year or two and whether because of that or resultant to that you have thought it prudent to maybe book profits in some stocks that you may have invested in 16 or 18 months ago and whether what we see today as your top ten stocks as a result of some churn in the portfolio in the last six to eight months. So have you held on to the stocks that you invested a year or two ago?

A: To a large extent we have held on to most of the stocks that we owned about 18 months ago, though we added some and some few have gone out on profit booking. But it has been more or less held through. The reason is if you look at 2003-2008 when the last big uptick in the economy happened we saw that BSE small cap index turned about 1,500 percent compared to about 600 percent and below for Sensex.

Even at the end of the first year one would have thought that the small and midcaps have rallied aggressively and probably were ripe to be exited but the story is quite long and much more attractive as you hold on because the rest of the four to five years of growth that we do see in the country we see the small caps growing substantially at higher earnings growth rates than the larger companies.

We believe that investors who have risk appetite would do well to kind of hold over a three to five years perspective in these kind of small and mid cap funds.

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