Smallcap index the barometer of investors' mood: UTI MF

Singhania: Point number one is yes, as a basket, this segment has done well, but as you rightly said, there is also going to be higher volatility. And being small, the possibility and the option of growing a bit faster in than the larger cap is also obviously there. However one point that we have to remember is that we cannot take midcap and smallcap as a basket. So there have been companies which have done very well but, there have also been some companies which have just disappeared.

So, when you go into investing in a mid and smallcap, you cannot take them as a basket. It is going to be more stock specific, more sector specific. Obviously, with higher volatility, return expectations are also higher and in cases where growth expectations arise, the valuations will also be higher. So, it will be a function of a combination of all these which will determine whether a stock is cheap or not cheap and whether it deserves a higher valuation or not.

Q: So, essentially, there are still opportunities but you have to be selective. So, it is not a basket approach, but more of a bottom-up stock driven.

Singhania: In mid and smallcap it has to be a bottom-up approach. Obviously, you will have a perspective that e-commerce can be a great segment. So, you might lead into that bottom-up depending on some of the themes which you basically decide on. However, it has to be stock specific, clearly.

Q: If I were to just drive on that point, what do you think has been some reasons for the performance behind the way the stocks have moved up? Is it fundamental or is that flows driven? Some of your thoughts on that?

Bhaskar: My view is that if you look at the smallcap space in India, it reflects the mood of Indian investors towards equity. So, if you were to see periods of time when they are not very positively inclined towards equity, then the smallcap index has given negative returns which is the period of 2011-2012. And when they are very positive on equities, this space gives very high returns. So, this you have to balance it in this context that a lot of Indian investors feel that the might of the foreigners and plus because of domestic mutual funds, these guys do not want to be in the largecap space or even in the midcap space and therefore this space is available for them to operate.

Post 2009, after the debacle of 2008 as such, a lot of funds took a policy to stay out of companies beyond a certain kind of market cap. And I think so, a few or several investors who had more foresight, who had more advantage were able to pick up stocks which were doing well. And then we had a bump up in the economy as such.

A lot of those companies were also related to the housing sector so you will find a whole lot of sectors related to housing where you have this smallcap exposure have done very well. So, it would not be very surprising to find that people who invested in 2009-2010 in the smallcap space are up 10-20 times from those levels.

What one should worry is from here on, what is there, because just the success of the space has made it much more viable for others and attractive and given our industries great ability not to miss on any opportunity, I am sure, we have already started the process of launching smallcap funds and we will do several more. So, here in terms of thought process is that, if you were to see the mood of Indian investors, then that is best reflected in the smallcap index and if it is flat or negative, then you will not get flows into equities as it is in India. And when you see that index is doing well, you will see flows into equities fairly strong.

Q: So, building up on that point, what are you hearing form the foreign investors on this particular space? What is the mood? How do they view the small and midcap space in India?

Radhakrishnan: From a foreign investor’s perspective, this is a very tough space to play. Typically, the money they want to invest in India is larger than the size of opportunities which is available in this listed space. So, they have till now been very tentative. If you look at the ownership of foreign investors in India of the total of USD 300 billion, more than, about 40 percent of that is in top-20 or 25 stocks. It is a very concentrated holding on very large companies and they have been therefore, like Anoop said, the moves of smallcap is more indicative of domestic bullishness and domestic investors’ bullishness till recently.

But off late, yes, there has been, looking at the space and some of the investors have shown willingness to take a concentrated mid and smallcap only kind of exposure to the Indian space. But it is in a very beginning kind of a stage. Unlike private equities where it is very well established, to invest in smaller sized firms.

In public equities, the foreigners would stick with liquid largecaps or large midcap names and they are reluctant to move down the cap curve.

Singhania: Again, the thought process of going too deep into the country to that extent would be limited and liquidity obviously, would be an issue. But all these becomes an advantage for an onshore asset manger like us. What we are also seeing is global investors are also realising that there is an opportunity specifically in upcoming sectors of investing in some of the smaller companies. And instead of going directly into those companies, at least we have seen mandates coming in from foreign investors to us that you invest on behalf of us. So, it is a great opportunity which they also realised and because they have challenge of investing directly, they are using onshore fund managers like us to try and make good of that opportunity.

Q: I would really pose a question to you more about how do you really meet the issues of how do you really manage small and midcaps? How different is it from managing a more diversified equity strategy compared to a smaller midcap. What are some of the parameters that you would keep in mind specifically for small and midcap funds when you are managing one of those?

Jain: At least in our company, I do not think we differentiate on the basis of capitalisation. And as I mentioned earlier, businesses which are, where the business itself tens to be in the small and midcap space and vice-versa. We tend to focus a lot more on the leadership of companies. If you are a leader in a small space, you will be a small or a midcap company, and if you are a leader in a large business, you will be a largecap company. So, we look at more from a perspective of competitive advantages and not from a perspective of capitalisation. So, there is not much difference in our opinion between how you manage a small or a midcap fund and how you manage largecap funds. And the difference is even less in the case of mutual funds because the liquidity needs of a mutual fund by its very definition are much lower.