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Reliance Small Cap: Fund Analysis

Wed, May 11, 2016

Source : Khyati Shah, Citrus Interactive

Reliance Small Cap Fund is small cap equity diversified fund. The primary investment objective of the scheme is to generate long term capital appreciation by investing predominantly in equity and equity related instruments of small cap companies and the secondary objective is to generate consistent returns by investing in debt and money market securities. The fund was launched in September 2010 and is benchmarked against the S&P BSE Small-Cap index. The fund has an AUM of Rs. 1,872 crore as on March 31, 2016 which is gone up by Rs. 314 crore as compared to last year March 31, 2015 (Rs. 1,558 crore).

Performance

The fund’s performance across different time horizons is extremely good as seen in the table given below. Since its inception the fund has given outstanding CAGR returns of 18.11 per cent whereas S&P BSE Small-Cap Index has given CAGR return of only 1.48 per cent. Its performance since inception has done better that its benchmark by over sixteen percentage points in CAGR terms. In the time horizon of 1, 3 and 5 years it has outperformed its category average and its benchmark, whereas it has underperformed in YTD and 6 months’ time horizons. The outperformance margin vis-à-vis its benchmark is substantially high. It has been in the top quartile in the time horizon of 1, 3 and 5 years.

	YTD	6 Months	1 Year	3 Years	5 Years	Since Inception
Reliance Small Cap Fund	-8.08	-4.03	8.35	38.59	20.59	18.11
S&P BSE Small-Cap Index	-6.89	-2.61	0.7	22.32	4.8	1.48
Category Average	-2.68	-2.18	-0.47	19.45	12.22	NA
Rank	154/159	128/156	5/155	2/141	7/134	NA

Figures are in % as on April 30, 2016; Returns above 1-year in Compounded Annual Growth Rate

When we look at the calendar year returns it’s quite clear that this fund has substantially beaten its benchmark in each of the last five calendar years. It has marginally underperformed its category average in the year 2011 but the outperformance margin vis-à-vis its category average is substantially high in 2012, 2013, 2014 and 2015. The fund has been in top quartile of its peer-set in the last four calendar years.

	2011	2012	2013	2014	2015
Reliance Small Cap Fund	-25.04	41.89	11.89	97.6	15.11
S&P BSE Small-Cap Index	-42.61	32.97	-11.23	69.24	6.76
Category Average	-23.85	34.15	5.43	54.07	3.69
Rank	85/132	26/137	9/141	5/144	7/152

All figures in % as on April 30, 2016

Risk: In terms of measures of risk such as Standard Deviation (measured over last three years), the fund has taken slightly higher risk compared to the category median whereas risk measure for Beta (measured over last three years) the fund has taken much lower risk compared to the category median.

	Standard Deviation	Beta
Reliance Small Cap Fund	0.94	0.66
Category Median	0.92	0.86

Risk-adjusted Returns: In terms Treynor and Sharpe ratio (measured over last three years), the fund has provided higher risk-adjusted returns than the category median.

	Treynor	Sharpe
Reliance Small Cap Fund	0.1	0.06
Category Median	0.02	0.02

Portfolio Characteristics

Sector concentration: The concentration of the fund in the top three, five and ten sectors is much lower than the category median.

	Top 3	Top 5	Top 10
Reliance Small Cap Fund	22.38	33.77	58.31
Category Median	37.63	50.87	71.34

Company concentration: The fund is diversified with concentration in top three, five and ten companies in its portfolio is much lower than the category median.

	Top 3	Top 5	Top 10
Reliance Small Cap Fund	13.49	18.96	30.99
Category Median	19.83	28.87	45.54

Sector & Company Concentration signifies that the funds maintain a fairly diversified portfolio.

Number of equity holdings: The fund currently holds 69 stocks in its portfolio (March 31, 2016), which is higher than the median stock count for the diversified-equity category, which currently stands at 45. Thus, based on equity count the fund runs a diversified portfolio compared to its peer set. Over the past five years the fund has always had a diversified portfolio with the number of equity holdings over this period averaging 50.

Thus, based on criteria such as equity count, sector concentration and company concentration, one can conclude that the funds maintain a highly diversified portfolio.

Cash allocation: Its cash allocation at the end of March 2016 was -0.65 per cent. The average cash allocation for last five years is 6.52 per cent. Its maximum allocation to cash over last two years was 13.91 per cent in September 2014 and lowest was -0.65 per cent in March 2016. In 2015 it had an average cash allocation of 4.07 per cent. Thus on the whole the fund maintains lower percentage of allocation to cash.

Portfolio Characteristics: The top 5 sectors in the portfolio had an allocation of 33.77%% which is lower than the category average of. 49.60%. The top 5 sector include Chemicals, IT – Software, Textile, Electronics – Components and Pharmaceuticals & Drugs.

The fund’s exposure to cyclical stocks currently is 66.81 68% followed by Services with 14.57% and Defensives with 9.85%. The Top five holdings are Intellect Design Arena Ltd., Navin Fluorine International Ltd., Vindhya Telelinks Ltd., GIC Housing Finance Ltd. and Orient Cement Ltd.

In the last six months the fund has bought stocks of Honda Siel Power Products Ltd., Bajaj Electricals Ltd., TeamLease Services Ltd., Quick Heal Technologies Ltd., Axis Bank Ltd., Genus Power Infrastructures Ltd., TD Power Systems Ltd., SREI Infrastructure Finance Ltd., Lovable Lingerie Ltd. and Claris Lifesciences Ltd.

Whereas stocks of TVS Motor Company Ltd., CCL Products (India) Ltd., CCL Products (India) Ltd., Capital First Ltd., Rico Auto Industries Ltd., KPIT Technologies Ltd., UFO Moviez India Ltd. and Power Mech Projects Ltd. have been dropped from the portfolio.

The current allocation to large cap is 7%, mid-cap is 67% and small cap allocation is 19%.

Process

Atleast 65% of the funds will be invested in equities & equity related instruments and upto 35% in Debt and Money Market instruments. The investment approach adopts prudent risk management measures like margin of safety and diversification across sectors & stocks with a view to generate superior risk adjusted performance over a period of time. The fund will have the flexibility to invest predominantly in a range of Small Cap companies/ stocks with an objective to maximize the returns, at the same time trying to minimize the risk by reasonable diversification. The fund attempts to generate superior risk adjusted returns by focusing on the smaller capitalization companies. Small cap stocks, for the purpose of the fund are defined as stocks whose market capitalization is in between the highest & lowest market capitalization of companies on S&P BSE Small Cap Index at the time of investment.

The fund’s expense ratio of 1.75% is significantly lower than the category average of 2.32%. Like most equity funds the fund has an exit load of 1 per cent on or before one year from the date of investment. Minimum investment in the fund is Rs 5,000.

Fund Manager

Reliance Small Cap Fund is managed by Mr. Sunil Singhania. He is CIO - Equity Investments at Reliance Mutual Fund. Mr. Singhania is graduated in commerce from the Bombay University and completed his Chartered Accountancy from the ICAI, Delhi with an all India rank. He has also earned the right to use the Chartered Financial Analyst designation, conferred by CFA Institute, USA. Mr. Singhania has additionally completed the Certification course for Derivatives conducted by the Bombay Stock Exchange securing an incredible 96% marks. He has a total experience of over 21 years. Before his association with Reliance Mutual Fund, he gained considerable experience on the sell side in Indian equity market. He was the Promoter of The Association of NSE Members of India; a body of stock brokers. He also sits on the Standards & Practice Council of the CFA Institute, USA, the first and only member so far based in India to do so. He has a long experience in fund management and has a sound track record. He is also the fund manager for Reliance Growth Fund and Reliance Mid & Small Cap Fund.

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Within the small cap funds category, the Reliance Small Cap fund has given an exceptional performance, and is clearly the one of the best small cap funds over the last few years. The performance of the fund since its inception is outstanding. A strong fund management team well diversified portfolio, low expense ratio and low turnover in the portfolio positions it favorably as a choice for the midcap allocation in your portfolio. However, the fund has been underperforming in the recent period – so needs to be watched closely.

RELIANCE SMALL CAP FUND

BEST SMALL CAP MUTUAL FUNDS

SUNIL SINGHANIA

S&P BSE SMALL-CAP

CITRUS INTERACTIVE

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