Recovery from near-zero NAVs
It’s agood time to look back at the 2008-12 volatile period and see which MFs came close to zero NAV
It’s a queasy feeling to invest in a new fund at, say, Rs.10 (or at an even higher net asset value, or NAV) only to see the NAV drop to single digits or come closer to zero. In practice, a mutual fund (MF) scheme’s NAV can be near zero but doesn’t go in the negative because of the way it is calculated—assets less current liabilities divided by the number of units. Assets are the market value of the investments, and liabilities include payments that the fund needs to make, say, towards redemptions. In practice, the value of the underlying investments is always more than the current liabilities. Hence, NAV stays in the positive zone.
It’s been more than a year since equity markets started to rise. It’s a good time to look back at the 2008-12 volatile period and see which schemes came close to the danger mark of zero NAV. We analysed diversified funds—large-cap and mid-cap-oriented MF schemes—with assets over Rs.100 crore to ensure that a sufficiently large number of investors are covered. We avoided thematic and sector funds as these are inherently riskier and are more prone to volatility. From the shortlist, we looked at five schemes whose NAVs hit the lowest levels—what went wrong with them; what are they doing now; and whether you should hold on to them or exit.
But first, a few caveats. The fund that hit the lowest NAV mark is not necessarily the one that underperformed the most. While a low NAV is an absolute number, a fall in NAV shows how the fund has actually performed in a given time period. Hence, this is not an exercise to shortlist the worst performing funds during 2008-12. Sure, the shortlisted funds underperformed, but there were others that have done worse.
Most funds that show a low NAV are those that have been launched recently or in the time frame before the fall. Schemes with a long history would have already seen their NAVs rise over the years. A single market fall is not enough to bring their NAVs down to Rs.10 levels or even below that. Hence, all of the schemes that made it to this list were those that were launched between 2006 and 2008. For example, HDFC Equity Fund’s lowest NAV in this period was Rs.91.23, which it hit on 9 March 2009, the day when all our five shortlisted funds also hit their lowest NAVs. But the scheme was launched in 1994 and hence has seen its NAV rise over a much longer period of time; a single market crash is not enough to erode all of that.
Third, absolute NAV levels don’t matter much as they reflect the market value of current investments. They don’t tell you anything about how the fund will perform in the future. That is why a fund with an NAV of Rs.10 isn’t cheaper than one with Rs.50. The purpose behind our exercise is that near-zero NAVs spook investors, especially those who invest at around 10. Let’s meet the shortlisted candidates.
JP MORGAN INDIA MID AND SMALL CAP FUND
This fund had the lowest NAV (Rs.2.69) in our set of 145 schemes, and that too barely a little over a year after its launch. JP Morgan India Mid and Small Cap Fund (JMSCF) invests in the bottom 25% of all the listed companies of the BSE Ltd and the National Stock Exchange.
Launched in November 2007, the scheme’s corpus stands at Rs.355 crore. It invests at least 65% of its corpus in small- and mid- sized companies and the rest in larger companies.
Fund manager Harshad Patwardhan, who also heads equities at JP Morgan Asset Management (India) Pvt. Ltd, said that during the market crash of 2008 and the volatile period that followed, the scheme did not hold cash in excess of 10%. “Our mandate is to invest in equities in the best possible way and not to second guess investor’s asset allocation. This is an open-ended fund, so there’s no need for us to sit on cash,” he said.
Looking back at the day when the scheme’s NAV hit rock bottom, Patwardhan said 2008 was an exceptional year. The Sensex saw the worst-ever loss in a calendar year in 2008 when it fell by 52%. “In 2011, when it posted its second biggest calendar year fall, it fell by 25%. Look at the difference,” he said. The scheme likes to go for companies that don’t need to raise capital often. As the underlying companies are small and relatively unknown, it invests in emerging businesses as well.
Before the 2008 market crisis reached its peak, said Patwardhan, macro trends were largely ignored. That has changed now. “This has been our biggest lesson. You cannot completely ignore external events,” said Patwardhan. So, in 2013, when the earlier government was still in power, JMSCF increased its exposure to cyclical stocks on the back of expectations of a change in the central government.
The scheme has recovered well. It has been in the top quintile consistently in the past few years, especially in the past two years.
With a corpus of Rs.400 crore, it’s well placed for an encore. Existing investors should stay invested.
BNP PARIBAS MIDCAP FUND
Talk of a turnaround and BNP Paribas Asset Management (India) Pvt. Ltd’s performance comes to mind. In 2011, on the back of large-scale changes in its equity fund management, most of the fund house’s equity schemes have turned around.
BNP Paribas Midcap Fund (BMF) has been a part of the Mint50—Mint’s curated list of 50 MF schemes—since January 2014. What’s unknown to many readers though is that its NAV had touched a rock-bottom Rs.3.49 in March 2009. In 2008 and 2009, BMF was one of the worst performers in its category. The fund went through a rough patch before Anand Shah joined the fund house in January 2011 and turned things around. Its present fund manager, Shreyas Devalkar, joined around March the same year and later took over the reins of BMF. In 2011, 2012 and 2013, the scheme was in the top quintile. Clearly, something was working at the fund house.
Shah changed the way the equities team at BNP Paribas Asset Management looked at investments. Instead of focusing too much on valuations, the fund house turned its attention towards analysing businesses. “Just because one large-sized company is trading at 20 times price-to-earnings valuation and a mid-cap company is trading at 10 times, doesn’t necessarily mean that this mid-cap company is a good buy. A mid-sized company has to become large or a market leader in the future,” said Devalkar. He doesn’t go for “very cheap” companies, nor does he shy away from paying a premium if he feels a company has the potential to grow further.
Devalkar laid down a three-point criteria, and a potential investment had to meet at least one of these—be a leader in a small market, be a challenger to the established companies, or be a “consolidator” or a company that either gets acquired or can acquire other companies. “Typically, in case of consolidations, the companies that survive create wealth,” said Devalkar.
Its holdings in companies such as Just Dial Ltd, Info Edge (India) Ltd, and VA Tech Wabag Ltd, among others, helped. BMF continues to be a part of Mint50. Existing investors can stay invested and could invest more if they wish to allocate to mid-cap funds.
DSP BLACKROCK MICRO CAP FUND
After the scheme touched its lowest NAV of Rs.4.20 in March 2009, DSP BlackRock Micro Cap Fund (DBMCF) hasn’t looked back. But 2008-09 was a dark period for all equity funds, and especially for those that focused on micro-cap companies or small-sized companies. In 2008, DBMCF was in the bottom quintile with a negative return of 63%.
Its present fund manager, Vinit Sambre, started managing the fund since June 2010. Sambre started to look at companies’ business and also liquidity. “Micro-cap companies are small-sized in nature and also illiquid. So, buying and selling in these companies is not very easy,” he said. Apart from business prospects and the ability of companies to outperform their categories, Sambre also checks managements credentials before investing. “Most of these companies don’t have a long track record, but we try to look at their past cash flows, whether there have been deviations in them or any signs of misallocation of capital.” How these companies have performed in falling markets and during adverse economic conditions is also something that Sambre looks at.
DBMCF is true to label and invests in only those companies that its mandate allows and name suggests. It avoids large-cap companies and invests about 75% in small-sized companies. The remaining corpus gets invested in mid-sized companies. Good and consistent performance resulted in a surge of inflows; from a size ofR363 crore in February 2014, its assets have jumped to Rs.1,931 crore as of April 2015. The fund does not accept inflows in excess of Rs.2 lakh per application. Its investments in companies such as Indoco Remedies Ltd, Solar Industries India Ltd and Symphony Ltd helped the fund’s performance.
Existing investors should stay invested and may put in additional amounts if they wish to invest in small-sized companies.
BIRLA SUN LIFE SMALL AND MIDCAP FUND
Birla Sun Life Small and Midcap Fund (BSSMF) is a younger cousin of Birla Sun Life Mid Cap Fund that was launched in 2002. Its launch in April 2007— just months before markets collapsed in 2008— is the biggest reason why it fell much more than the mid-cap fund in 2008 (62% versus 58%). While the mid-cap fund invests significantly in stocks with a market capitalization of Rs.3,000 crore or more, BSSMF focuses on companies with market capitalization between Rs.500 crore and Rs.3,000 crore. Over the past one year, its exposure to large-sized companies has gone up from 0.58% in May 2014 to 16% in April, as per figures by Value Research. “But it is our endeavour to bring this down. We also want to increase the exposure to small-sized companies. It’s a matter of being comfortable with the underlying economic recovery, which is already underway,” said Mahesh Patil, co-chief investment officer, Birla Sun Life Asset Management Co. Ltd.
Investing in small-cap companies comes with its own set of risks. The quality of management is a significant one. Patil said the fund house insists on doing a forensic analysis of the company. “Sometimes, we find that the company makes profits but has a large number of debtors. We are not comfortable with such companies. Some companies’ books appear to be in order, but background research on promoters doesn’t give us encouragement to invest in those companies. So, we avoid them,” said Patil.
BSSMF follows a bottom-up stock picking strategy. Its corpus size has moved up from Rs.83 crore at the end of January 2014 to Rs.182 crore as of end-April 2015. One of the reasons why the size hasn’t moved much in the past one year, despite a surge in small- and mid-cap scrips and the subsequent investor interest, is that the fund house launched a number of closed-end funds in the same space. In 2014 itself, Birla Sun Life AMC launched five mid- and small-cap schemes that collected more than Rs.400 crore, according to Value Research. “But our focus on this fund will remain,” said Patil.
BSSMF’s track record and presence of better alternatives doesn’t inspire confidence. We suggest that you either switch to Birla Sun Life Mid Cap Fund, or to better alternatives in the small-cap space.
BIRLA SUN LIFE SPECIAL SITUATIONS FUND
Birla Sun Life Special Situations Fund (BSSSF) is a diversified equity fund that focuses on large- and mid-sized companies. Launched in December 2007—just two months before equity markets fell on the back of the global credit crisis—it collected close to Rs.900 crore. As of April 2015, its size wasRs.138 crore.
BSSSF invests in companies that are going through a “special situation”—merger or acquisition, buyback of shares, debt restructuring, among others. BSSSF also looks at companies that are contrarian investments, or are currently out of favour or neglected, but where it sees potential.
The fund is managed actively because it is like a thematic fund, and opportunities are not that many. In falling markets, it becomes more diversified, but in rising markets, the portfolio tends to be concentrated.
Between September 2011 and March 2013, its portfolio had as many as 55-60 stocks. In the past 10 months, it has held an average of 32 stocks. “When equity markets go up, we get many opportunities. Our portfolios tend to become more concentrated then,” said Mahesh Patil, co-chief investment officer, Birla Sun Life Asset Management Co. Ltd.
Its cash allocation also goes up more than usual. A higher allocation to mid-cap stocks in the past one year contributed to its performance; with 62% returns, BSSSF was the top large- and mid-cap fund in 2014.
Of late, it has done better than other ”special situation” funds, but its long-term track record isn’t impressive. A specialized and cyclical fund like this isn’t for everyone. It may be better to stay with diversified schemes.
http://www.livemint.com/Money/5JPEbNSq7aHPqveNBKJsAK/Recovery-from-nearzero-NAVs.html
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