Find out why DSPBR Micro Cap Fund is underperforming

Not long ago, every investor wanted to put money in DSP BlackRock Micro Cap Fund. Many of them were disheartened when the scheme stopped taking money in February. However, existing investors were concerned whether the scheme has become too big to manage and whether its performance would dip. The scheme’s short-term underperformance is causing a lot of concern among these investors. ET.com Mutual Funds spoke to Vinit Sambre, fund manager, DSPBR Micro Cap Fund, to find out the reasons behind the short-term underperformance and what is in store for investors.
Edited interview.

Many readers have been asking us about the underperformance of DSPBR Micro Cap Fund. The scheme has been underperforming its benchmark and category in one-month, three-months and one-year horizons. What is the reason?

We would like to list down the following reasons for the current underperformance:


1. Our cash holding was higher than normal post-demonetisation, as we decided to go slow on investments on the belief that the price correction would be deeper than what we saw. Further, against our expectation, the down drift didn’t last long enough and we didn’t deploy a large chunk of the cash back into equity. A good proportion of underperformance could be explained due to high cash levels.

2. A few of our large holdings had significant run up in the past two to three years and are now facing temporary business slowdown. These stocks are consolidating at the current levels. Our conviction on the long term outlook for these companies is still intact and we have chosen to look beyond the short-term problems and stay invested.

3. We are of the firm belief that towards the latter part of any extended period of the bull market, the poor quality businesses starts outperforming good quality companies as they look cheap. Being in the small and micro-cap category, we would like to avoid such names. We would continue to stick to our investment philosophy which we have adopted since beginning and would like to avoid investing into inferior businesses for the sake of seeking alpha in the short term.

4. Just to reiterate as a part of our investment philosophy, we try to identify companies which are run by capable and credible management teams. The companies should have demonstrated a long history of generating positive cash flows, superior ROCE, and should possess sustainable competitive advantages. We follow a buy and hold approach. We also look at some cyclical businesses at the cusp of a turnaround, where ROCEs are slated to move up in the foreseeable future.

The scheme is underperforming its peers by a large margin. It’s a cause of concern for investors. Please comment.

We have already enumerated the reasons for the underperformance in detail above. We believe that we have acted in the best interest of our investors by sticking with our investment philosophy and are confident of better outlook over long term (two to three years).

The scheme has a high exposure to chemical stocks. Do you think it was a bad call?

We do not think it was a bad call and we continue to hold a positive view on our companies within this segment.

You stopped the inflows in the fund a few months ago, so that the AUM doesn’t impact the performance of the fund. But the strategy doesn’t seem to have worked in your favour.

We have been early in indicating the risk of valuation and liquidity in case of micro cap stocks and took the prudent decision to stop flows into our DSPBR Micro Cap scheme. We took the decision in the best interest of the investors.

We are comfortable with our AUM currently and do not think is hurting our ability so much. To us, the reasons enumerated above are leading to this temporary underperformance.

The scheme is investing 60 per cent in smallcap stocks and 39 per cent in midcap vis-a-vis the category (46 per cent in each). Is this also a reason for the underperformance?

The mandate of the scheme is to invest minimum of 65 per cent in equities classified as microcap (stocks beyond the top 300 by way of market capitalisation) and we have stuck to the mandate.

A lot of investors are really concerned. What do you want to tell them?

This fund is predominantly invested in microcap – smallcap segment as evident from its name. This kind of portfolio usually appreciates over a period of time and is also subject to short-term volatility. Therefore, it is apt to evaluate it from a long term perspective and not get worried from short term volatility. We would like to assure you that we are closely monitoring our fund on a regular basis.