Seven out of top 10 Asian small-cap funds are Indian

Indian funds have clinched seven of the top 10 spots in the ranking of leading small-cap funds across Asia, thanks to wise stock picking amid investors’ growing appetite for cheap stocks with the potential to deliver multiple bagger returns.

An analysis of nearly 300 Asian small-cap programs shows that the DSP BlackRock Micro Cap Fund leads with a return of 82% over the past year. Managed by Vinit Sambre, this fund, which has been with DSP BlackRock for just over three years, has also comfortably outperformed the 58% rise in BSE’s small-cap index since August 2009. The 30-stock benchmark Sensex is up 20%, while the broader BSE 500 index is up 27%.

The other six programs — Sundaram BNP Paribas Select Small Cap, HSBC Small Cap, JPMorgan Smaller Companies, Franklin India Prima, Franklin India Smaller Companies, and ING Vysya CUB — have given investors returns of between 44% and 57% on a trailing-12-month basis . These systems manage anywhere from 46 crore to 954 crore.

Four of these funds were launched during the peak of the previous bull market between January 2007 and March 2008, and investors in these funds also saw their initial investments fall sharply in the subsequent downturn.

Mutual fund tracking firm Value Research called the DSP fund an impressive product across the “small-cap universe,” noting that the stocks it holds are “credible, household names and the portfolio clearly lacks momentum.” . The Fund’s holdings include companies with a high return on equity and strong leadership niches in their industries.

Dhirendra Kumar, CEO of Value Research, said the closed-end nature of some of these funds helped them weather the market turmoil. “These funds did not experience redemption pressure during the downturn. This, in turn, helped them invest for the longer term,” he said.

The DSP fund became perpetual in June of this year and fund manager Mr. Sambre has kept nearly 10% of its $311 billion corpus in cash to meet potential redemptions and take advantage of every opportunity in the market.

There are 10 small cap funds in India managing approximately 3,450 crore of shares. These account for just 2% of all assets under management under equity programs.

Market experts say the rally shifted to small-caps as many large-cap stocks became fully valued and relatively unattractive over the past year. Stocks like cooler maker Symphony and luggage maker VIP Industries have led the small-cap load in the market. Ahmedabad-based Symphony is up 830% over the past 12 months, while VIP is up 548%. In comparison, Sensex’s top two gainers — Tata Motors and Tata Consultancy Services — are up 135% and 61%, respectively.

“Many small caps with great companies were trading at pitifully low valuations — many were trading below book value and with dividend yields of 5-7%,” said Deven Choksey, chief executive officer at KR Choksey Shares & Securities. “They were just bought heavily.”

Although small-cap funds have posted solid returns over the past year, experts say investors need to be cautious and only keep 10-15% of their equity exposure in such funds or companies. This is largely due to the volatile nature of their stock performance.

“Investors should have a strong stomach and the ability to do so

such funds can withstand significant declines,” says Mr. Kumar of Value Research. Seven out of top 10 Asian small-cap funds are Indian

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