Small is beautiful, according to Sunil Singhania, who last week became India’s biggest mutual fund manager when he was named head of equities at Reliance Mutual Fund. Now in charge of over Rs 34,000 crore of equity assets, he takes over from Madhusudan Kela, who has become chief investment strategist at mothership Reliance Capital.
Talking to DNA, Singhania said some small-cap companies with new promising themes offer significant growth potential over the long term. And India is expected to remain relatively unaffected by recent global concerns, he firmly believes. Excerpts from the interview:
What’s the rationale behind launching a small-cap fund?
Reliance Mutual Fund, currently, has no product in its portfolio that concentrates on predominantly investing in small-caps. So to complete its product basket, the small-cap fund is being launched.
Also small-caps tend to be available at lower valuations than larger companies. The reasons include small size, no research, less visibility and no institutional ownership. Any new theme that starts has to begin small.
In the past, we have seen software services, telecom, retail, real estate and even pharma start very small. In a growing economy many more new themes will offer exciting growth potential. Thus the attempt would be to capitalise on the differential valuations of small-caps vis-a-vis large-caps as also participate in a few promising new themes.
What fundamental parameters should one look at while picking small companies?
Smaller companies will give great returns only if they graduate into much larger companies. Thus the size of opportunity, passionate promoter, business model and minority shareholder interest become very important. Obviously all other fundamental parameters also have to be seen.
Several of the mid-cap and small-cap stocks have rallied a lot in the last six months. Does this rise seem sustainable? Why?
There are definitely concerns in a few stocks, where the volumes and price movement clearly is illogical. However, a few smaller companies have performed very well and our guess is that long-term investors have started investing in a few promising ones. Stock specific, we still believe there are good opportunities in this segment.
In the event of any turmoil, financing to smaller companies tends to take a hit. Does this pose a risk to the sustainability of earnings in the small-cap space?
This is absolutely right. However, we believe that the possibility of a 2008 type of financial turmoil doesn’t look likely again. Also even smaller companies have started to attract the attention of long-term investors and thus equity funding is also not that difficult. Almost all banks have specific SME cells and for good companies, debt funding is also not an issue.
What’s the rationale behind launching a small-cap fund?
Reliance Mutual Fund, currently, has no product in its portfolio that concentrates on predominantly investing in small-caps. So to complete its product basket, the small-cap fund is being launched.
Also small-caps tend to be available at lower valuations than larger companies. The reasons include small size, no research, less visibility and no institutional ownership. Any new theme that starts has to begin small. In the past, we have seen software services, telecom, retail, real estate and even pharma start very small. In a growing economy many more new themes will offer exciting growth potential. Thus the attempt would be to capitalise on the differential valuations of small-caps vis-a-vis large-caps as also participate in a few promising new themes.
What fundamental parameters should one look at while picking small companies?
Smaller companies will give great returns only if they graduate into much larger companies. Thus the size of opportunity, passionate promoter, business model and minority shareholder interest become very important. Obviously all other fundamental parameters also have to be seen.
Several of the mid-cap and small-cap stocks have rallied a lot in the last six months. Does this rise seem sustainable? Why?
There are definitely concerns in a few stocks, where the volumes and price movement clearly is illogical. However, a few smaller companies have performed very well and our guess is that long-term investors have started investing in a few promising ones. Stock specific, we still believe there are good opportunities in this segment.
In the event of any turmoil, financing to smaller companies tends to take a hit. Does this pose a risk to the sustainability of earnings in the small-cap space?
This is absolutely right. However, we believe that the possibility of a 2008 type of financial turmoil doesn’t look likely again. Also even smaller companies have started to attract the attention of long-term investors and thus equity funding is also not that difficult. Almost all banks have specific SME cells and for good companies, debt funding is also not an issue.
Concerns over the global economy continue to persist with weak housing sales and other economic data from the US and the downgrade of Ireland by S&P. Can Indian equities remain immune to the bad news?
In the near term, no economy or markets will remain immune to global shocks. However, the period of 2008 and 2009 has been a sort of a boon for India. The world realised that Indian financial system was strong, stable and resilient. It also highlighted that India was the least impacted economy in the worst financial turmoil in the developed world. We do believe that India, this time, will be much less impacted even if there is bad news in the world.
Small-cap and mid-cap stocks tend to be more volatile and react quickly to any negative market sentiments. How do you see appetite among investors for a small-cap fund when equity MFs are seeing outflows?
We have been very upfront with our distributors and potential investors in communicating that the small cap fund will be volatile. It will be aggressive and will fall in the high-risk, high-return category. Though we do believe that over a period of time, the volatility tends to even out. Feedback from the initial few roadshows has been very positive and we are confident that investors, who share our optimism on the long-term India story, will invest.
How are valuations for the broader market looking? Is this a time for caution? What kind of cash levels are you maintaining?
Valuations are fair from a near term perspective. However, we do believe that earnings growth outlook is quite strong and hence the price-earnings (P/E) one or two years forward might not look all that high. My guess is that long-term global investors are looking at that and it also explains the huge FII flows in Indian equities in recent times. We are concentrating more on sector and stock calls right now and hence our cash levels would be between 2-7% across our schemes.
As a house, are there any contrarian calls that you are taking at this time?
We continue to evaluate on a daily basis. Though not a big conviction at present, we are looking at metal sector more closely after the recent big under performance.
Is there an art to knowing the right time to sell a stock? Reliance MF has been known to hold onto good stocks until they turn into multibaggers; how could retail investors avoid selling too soon?
As far as we are concerned, one of the largest teams in equity management in India ensures that research on almost all the stocks worth investing is done in-house. This also enables us in avoiding selling too early and enjoying the full benefits of the growth in a company. Retail investors should invest through mutual funds to avoid making the mistakes of investing on hear say and then seeing huge losses in non-fundamental momentum stocks.
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