You have mentioned that when a small-cap fund crosses Rs.2,000 crore, it often faces a winner's curse and we should take our money out to invest in a smaller or a new fund. I have made investments in DSP small caps for a time horizon of 20 years. Now when its AUM is crossing Rs. 2000 crore, should I stay invested and continue my SIP in the fund?
- Anubrata Karmakar
Yes, I have said that and I still believe in it because I find that in the small-cap universe, the problem is not that a small-cap will not do well. It is the winner's curse because of the limit of a fund manager's bandwidth.
Assume that there is a company with a market capitalisation of Rs. 2000 crore and a fund ends up owing 5 per cent of it. Now imagine the scale of investment. For a fund, this will be a very sizable investment. So if you run a Rs. 2000-crore fund, you want it to be reasonably diversified but you are restricted by the scale of investment that you can do in any individual company. So, a large small-cap fund has to diversify. But spotting many good-sized companies with the potential to meet your aspiration becomes a challenge. This is because we expect our small caps to be multi-baggers over a time frame of five to seven years and that by very design will not be too many. So, I think if a small-cap fund turns big, be watchful about the fund which grows more than Rs.2000 crore.
At times, some of these fund managers go about justifying their foray into larger small caps i.e. somewhere in between small and mid cap. In such cases, they cross the size ceiling of true small caps but the SEBI classification system also provides for that. So, there is nothing illegal about it. It is diluting the style purity in a legitimate way and they find a justification. But we are not investing for justification. We invest in a small-cap fund for the promise that it has. We are willing to take the risk and we should be wary of when it stops working.
But this Rs.2000 crore of hard limit that you are referring to may change a little bit. It could be Rs.2000 crore, it could be Rs.3000 crore. This is because even larger small caps are also getting relatively bigger. If you look at the size of the market, the bottom 10 per cent accounts for true small caps. But with markets growing, the size of this small-cap threshold can also go up. So from that standpoint, you can be a little liberal, but yes that principle remains the same.
