[ad_1]

Sunil Subramaniam, MD & CEO, Sundaram Mutual, says “I would say wait and watch. There is a continuing SIP book, which will mean that within the PSU pack those which still look very good from a growth perspective would find some buyers but I would be very selective in terms of not buying the overall PSE index and all the stocks there. Caution is the watchword at this point in time in that space.

What do you make of the capitulation in smallcaps yesterday? Have you already made the switch to largecaps?
Sunil Subramaniam: It is driven partly by the regulator driving through AMFI, the need for each fund house to review their mid and smallcap funds, both from a portfolio liquidity perspective as well as taking care of the small retail investor. They are saying if you want to protect the investors already there, please moderate the inflows, raise necessary liquidity and make sure that you have enough to meet any large redemptions if any institutional or big-ticket investors put in a redemption.

Unlock Leadership Excellence with a Range of CXO Courses

Offering College Course Website
IIM Kozhikode IIMK Chief Product Officer Programme Visit
IIM Lucknow IIML Chief Executive Officer Programme Visit
IIM Lucknow IIML Chief Operations Officer Programme Visit

I think what has happened since then is that some fund houses have introduced a kind of moderation in the flows, stopping lump sums, limiting SIPs. At the same time, at the back end, each smallcap and midcap fund, as you know, the Sebi rule says 65% has to be in midcaps and midcap fund and (00:02) 65% in smallcaps. But many fund houses had two things. One, instead of 65%, they probably had 75-80% in the smallcap or the midcaps. This would narrow down the liquidity because the balance has to be either cash or largecaps. Naturally, they would be selling the excess over 65% in smallcaps and midcaps in the respective funds and creating that liquidity either through cash or through a highly liquid largecap.

Second, many fund houses have been worried about the rise in valuations and expanded their portfolios. So, there are some funds which have an excess of 150 stocks in their smallcap funds, for example. So, then you are looking at it from a potential perspective and if you already have a very large SIP book running – SIPs have gone up from Rs 12,000 crore at the beginning of this financial to Rs 19,000 crore and more than 50% of the increase has come from small and midcap funds.

So, those fund houses which are getting these SIPs are aware that every month on month, they will be getting flows into these. Now, if they have already crossed 150 stocks, is there room to go and deploy it? Naturally, they have to take a pause and say, we will stop fresh inflows. At the same time, given the fact that as a correction like this happens, you might see large-ticket investors try to cut their losses or book profits because obviously everybody has made money in the smallcap and midcap funds and when that happens, you need to have adequate liquidity. If you sell only your largecaps when the redemption comes, then concentration of the portfolio increases.

So, you will have to sell a little bit of smallcaps, a little bit of the midcaps and some largecaps to meet those potential redemptions. The Sebi guideline which came in through AMFI basically asked the boards of each AMC to review their respective small and midcap funds from a unit holder protection perspective and institute all these measures. Probably various fund houses are going and presenting. There is a 21-day timeline and they are studying it and the fund manager may feel he can take in more money, but the board will say in the event of a selloff, more liquidity will be needed. The point I wanted to take forward with you was the earnings quality. The only solace one can get from this kind of a market, if already running an individual portfolio or maybe have a large exposure to smallcap and midcap, is taking stock of the earning situation. We have just wound up the third quarter earnings season. How is the picture looking? Was the quality of the universe you guys track at your midcap or smallcap funds good?
Sunil Subramaniam: In fact, the earnings was the best for the smallcap set and then the midcap and then the largecaps. They were almost double the earnings growth of the largecaps. So, definitely the domestic economic growth is translating into higher earnings for smallcaps. These companies are highly operating and financially leveraged small and midcaps. So, when there is economic uptick, their bottom lines grow much faster than their top lines. We are seeing that impact play through. Overall, we are quite happy with the quality of the earnings at the midcap and smallcaps relative to the largecap. So that is not an issue.At your own place, have you initiated the stress test? What exactly would that stress test entail for small and midcaps?
Sunil Subramaniam: It is basically about liquidating the portfolio in the event of a sudden setback or large investor pulling out suddenly. How will the fund respond to it? In our case, we have always followed prudence. For example, in our smallcap fund, we have 65% as the minimum; so 70-72% is with smallcaps, which means that we have 20% in the large and midcap stocks in that fund. So, obviously the liquidity functions are very good when you test it.

Similarly, in our midcap fund, we have got 65-70% only in midcaps. We have 15% to 20% in largecaps. This means that if there is a sudden redemption, we can liquidate the largecaps without any price impact and then over the next few days restore the balance of largecaps by slowly selling the midcap or the smallcap as the case may be.

Essentially, the stress test reveals that if there is a sudden shock, a whiplash of some investor pulling out, will you have trouble in selling your most appreciated smallcaps? Your position will be that what has gone up the most is what I would like to sell. But no, market conditions will not allow you to do that. So, the stress test shows that and like I said, we have been very prudent. One of the reasons we have a very long running funds is because risk management has been a very key part of our portfolio and we have not gone overboard. Whereas if a fund manager has taken 85% smallcaps say, he has got only a 15% cushion and if he has large ticket big investors who have put in the money there, then if they decide to pull out for whatever reason, booking profits, then the fund could face a challenge.

So, SEBI’s purpose of doing the stress testing is intended and in anticipation of the stress testing, a lot of funds are now reallocating their portfolios and adding more cash or more largecaps to their smallcap and midcap funds that is part of the reason the market is reacting because overall as an industry, those funds which had taken much more than the minimum regulatory requirement of smallcap and midcap have to pare it down to maintain liquidity, so that in the stress testing, they will come out looking good.

What explains the kind of fall that we are seeing in PSUs? Do you think the power pack PSUs especially were overheated or do you think this is a healthy correction and for people who were looking at a buying opportunity this might be the time just to reallocate the portfolio towards PSUs?
Sunil Subramaniam: I am bearish on PSUs. I think they ran up because of the sheer volume of liquidity that came in due to the SIP book into the mid and smallcap segment and most of these are in the mid and smallcap segment and the discount to the private sector made them look very attractive from a margin of safety perspective but we have not seen nothing that shows a very strong…,

In a sector which is doing well, PSU stocks will do well. But relative to the private sector, there was a very solid reason for why there was a discount for a PSU compared to a private sector, for issues of professionalism, management and capital allocation and all of those, have not gone away.

We have not taken an overexposure to PSUs in our funds and we think that just as the liquidity coming in raised these stocks up, the liquidity drying out is also having a greater impact on these because fundamentally that much has not changed in the PSU world from a business perspective compared to their relative private sector counterparts. So, I would say that it is not a time to jump in. We are not going to be jumping and buying those PSUs which have corrected a lot. We will wait.

There is a fundamental reset in terms of the mutual fund portfolios because of the SEBI direction that smallcap funds will bring down their smallcap exposures and add to large and large midcap funds and midcap funds will also try to bring down the midcap and add more largecaps. So, if this money is going to then get reallocated into larger midcaps and largecaps from the smallcap, it is going to take some time before these kind of PSUs will get that kind of liquidity to back them up.

So, I would say wait and watch. Yes, there is a continuing SIP book, which will mean that within the PSU pack those which still look very good from a growth perspective would find some buyers but I would be very-very selective in terms of those, not to buy the overall PSE index and all the stocks there. Caution is the watchword at this point in time in that space.

[ad_2]

Source link