Identifying broader themes early and applying the bottom-up approach helped reap big gains.
The DSP BlackRock (DSP BR) Micro Cap Fund invests in small caps (scrips other than the top 300 by market capitalisation), with a focus on a select portfolio of about 40 scrips. It was managed by Aniruddha Naha during the 12 months ended July 2010. Naha has since left the organisation. A concentrated portfolio and the ability of the fund manager to identify and pick up growth stories at low valuations has helped the scheme return 115 per cent in 2009 outperforming category and broader markets. Over the last six months, the scheme has returned 28 per cent as compared to the category return of 18 per cent.
Picking the right bets
The investment strategy for the fund included a mix of top-down and bottom-up approaches. A top-down approach to identify broader themes like consumption was followed coupled with a bottom-up approach to identify winners based on factors such as scalability of business, entry barriers and visibility of earnings. The portfolio indicates that the thrust was on stocks which could sustain cash flows to fund expansion and ensure sustainable return on equity. The stocks in the portfolio suggest that the fund manager was betting on agro-based businesses, infrastructure and consumption themes.
| TOP EQUITY HOLDINGS | |
| Company | % of Net Assets |
| Hindustan Dorr-Oliver | 4.91 |
| Jubilant Organosys | 4.23 |
| Jyothy Laboratories | 4.16 |
| IPCA Laboratories | 3.28 |
| TRF | 3.03 |
| Fund Size - Rs 350.52 crs. (as on 30-Jul-10) Source: ICRA Online | |
| SMALL DELIVERS BIG RETURNS | ||
| Returns (%) | Fund | Category |
| 1 month * | 5.89 | 2.42 |
| 3 months * | 11.14 | 3.59 |
| Year to date * | 37.68 | 7.93 |
| 1 year | 85.15 | 28.82 |
| 3 Years | NA | |
Source: ICRA Online
Agri-business
Within the agro chemicals and fertiliser space, the fund bet on Coromandel Fertiliser which has done well due to a jump in sales of complex fertilisers following the launch of the nutrient-based subsidy scheme. The fund also bet on Rallis due to demand for agrochemicals, and participated in the rally in tea stocks by betting on Mcleod Russel and Jayshree Tea, both of which did well on higher demand brought about by the tea shortage in Sri Lanka and Kenya.
Infrastructure
The fund manager was also bullish on ancillary space in the power sector given the focus on companies such as TRF and McNally Bharat, operating in the in-demand balance-of-plant (BOP) segment. The scope for growth in this space was good as quarter of the costs of generating power is related to the BOP space and there has been shortage of quality players in the segment. In addition to this, the fund manager was also able to identify winners such as Hindustan Dorr Oliver, which operates in mineral beneficiation and water treatment space.
Consumption
The fund focused on consumer durable companies, which were expected to benefit from the crash in raw material prices a year and a half ago creating a margin buffer. Unlike other sectors, demand was strong and brought about by the pay revisions for government employees and NREGA programme in rural areas.
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Low penetration, movement of unbranded to branded goods and the fact that these were cash generating companies made it easier for the fund manager to pick up names such as Whirlpool, TTK Prestige, Bata India and Nilkamal.
What didn’t work
The scheme had a sorry 2008 with the net asset value of the fund falling below Rs 5 and returns for the year at -63 per cent. While some bets such as Western India Shipyard and Quintegra Solutions did not work, the scheme also saw liquidity pressures. Like other fund houses the fund would have gone through a rough patch in 2008, when irrespective of fundamentals, share prices fell sharply and impacted returns.