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Sundaram Select Small Cap Fund (SSSCF) is one such close-ended fund from the stable of Sundaram Mutual Fund, which follows a growth style of investing. Being launched in February 2007 the fund has completed a little over 4 ½ years now.
The fund's primary investment objective is "to generate consistent long-term returns by investing predominantly in equity / equity related instruments of companies that can be termed as smallcaps."
SSSCF follows a mandate of investing 65% - 100% of its assets in equity and equity related securities of small companies, while not refraining from investing upto 35% exposure in companies other than small caps. Also having a defensive consideration the scheme may also invest upto 35% of its assets in debt and money market instruments to manage its liquidity requirements.
Over the past one year SSSCF's has held a dominant exposure to small and mid-caps ranging from 49% - 97%. But ascertaining the recent volatility in the Indian equity markets steered by global and domestic economic worries, the fund has gradually taken exposure in the large cap space since August 2011 (ranging from 10% - 22%) thus preferring to be defensive. Also since July 2011 the fund has preferred to take aggressive cash calls (ranging from 3% - 40%) citing the volatility in the small and mid-cap domain.
Equity Portfolio
| Holdings | June 2011 | July 2011 | Aug 2011 | Sept 2011 | Oct 2011 |
| Wabco India Ltd. | 9.8 | 11.6 | 12.0 | 12.4 | 13.1 |
| Rallis India Ltd. | 6.1 | 6.3 | 7.0 | 7.3 | 6.3 |
| Bata India Ltd. | 8.0 | 7.4 | 6.8 | 4.5 | 4.9 |
| Magma Fincorp Ltd | 5.0 | 4.9 | 5.4 | 5.0 | 4.4 |
| Hindustan Unilever Ltd. | - | - | 2.0 | 3.0 | 4.4 |
| Indian Bank | - | - | - | 3.6 | 4.0 |
| Bharti Airtel Ltd. | - | - | 1.9 | 2.7 | 3.8 |
| Sundaram-Clayton Ltd. | 3.6 | 3.6 | 3.5 | 3.5 | 3.7 |
| Time Technoplast Ltd. | 3.8 | 3.6 | 3.8 | 3.6 | 3.5 |
| Mcleod Russel India Ltd. | 4.8 | 4.7 | 4.4 | 3.5 | 3.5 |
As far the portfolio is concerned, SSSCF's latest portfolio constitutes of both 'A' and 'B' group stocks, but 'A' group ones hold a dominance (constituting 59% of its total equity portfolio). In the top-10 holdings, stocks such as Hindustan Unilever Ltd. and Indian Bank Ltd. (which are the 'A' group ones), have been new entrants in the fund's portfolio is the last one year, as the fund has preferred adopting a gradual defensive stance in the present volatility of the Indian equity markets. Similar defensive approach has also been observed in the SSSCF's "other than top-10 holdings", where it has added large cap stocks such as Hero MotoCorp Ltd., ITC Ltd., HDFC Bank Ltd., HDFC Ltd., State Bank of India and Bank of Baroda in the last one year. However the fund has refrained from churning aggressively as revealed by its petite portfolio turnover ratio of 0.71 times.
Being benchmarked to the BSE Small Cap Index, SSSCF holds 22 stocks in its latest portfolio (i.e. as On October 31, 2011), where the top-10 stocks and top-5 sectors constitute 51.6% and 43.2% respectively of its total portfolio. It is noteworthy that while undertaking its stock picking activity SSSCF follows a bottom-up approach, and takes exposure across sectors.
How SSSCF has fared vis-à-vis its peers
| Scheme Name | 6-Mth (%) | 1-Yr (%) | 3-Yr (%) | 5-Yr (%) | Std. Dev. (%) | Sharpe Ratio |
| DSPBR Small & Mid Cap-Reg(G) | -12.2 | -18.8 | 36.3 | 8.0 | 8.64 | 0.28 |
| Sundaram Select Small Cap(G) | -6.9 | -18.2 | 33.7 | - | 9.71 | 0.23 |
| ING C.U.B(G) | -17.2 | -23.1 | 31.4 | 5.0 | 9.38 | 0.21 |
| Birla SL Small & Midcap(G) | -8.0 | -19.5 | 31.1 | - | 9.01 | 0.23 |
| Franklin India Smaller Cos(G) | -15.0 | -21.8 | 29.8 | 2.2 | 9.12 | 0.21 |
| Reliance Small Cap(G) | -15.4 | -18.0 | - | - | 4.79 | -0.32 |
| BSE SMALLCAP | -26.3 | -39.1 | 22.9 | -1.8 | 7.94 | 0.17 |
The table above reveals that, so far the performance of SSSCF has been quite luring. Over a 3-Yr time frame, the fund has clocked a return of 33.7% CAGR, thereby outperforming its benchmark by a substantial margin.
However when assessed on the volatility front, SSSCF has exposed its investor to highest risk (as revealed by its Standard Deviation of 9.71%). While this is the trait of a small cap funds, the risk adjusted returns (as reveled by the Sharp Ratio of 0.23) are quite middling considering the risk involved, thus making it a high risk-average return investment proposition in the category.
Fund Manager Profile
| Name of the Fund Manager | Mr. Satish Ramanathan |
| Total Work Experience | Over 16 years |
| Managing the fund since | Sep-07 |
| Qualifications | B.Tech, MBA, CFA |
As seen above while Sundaram Small Cap Fund's returns are quite luring, the same have been clocked by exposing its investors to very high risk. Moreover for the risk exposure, the risk-adjusted returns generated by the fund are middling thus making it a high risk- average return investment proposition in the category.
While the fund is taking a gradual exposure in the large cap segment as a defensive strategy during the present volatility of the Indian equity markets, it may not be able to keep pace with the present luring returns generated by the fund. Hence given the above we think that whenever an exit window is available for this close-ended fund, existing investors should exit from the fund.
Investing in small cap stocks is always risky as they are often illiquid and tend to fall more during the market downtrend. Investing in a fund focusing on the small cap space is subject to all these risks and hence instead of concentrating only on the absolute returns; other attributes of these funds should also be analysed carefully before investing in them.
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