Edelweiss Small Cap Fund : Review

Edelweiss Mutual Fund has launched a new fund Edelweiss Small Cap Fund. The NFO opened for subscription on January 18 and will close on February 1, 2019. The last one year has been very difficult for small-cap stocks with the Nifty Small Cap 250 Index falling 28% in 2018. Deep corrections, however, create attractive investment opportunities and this may be an exciting time for investing in small-cap stocks.

Key NFO Features

NFO Period:

January 18 to February 1, 2019

Exit Load:

If units are redeemed or switched out before 365 days – 1%, if units are redeemed or switched out after 365 days – Nil

Switches:

Switches from equity schemes and other schemes – Feb1, 2019; till cut off time

Minimum Investment Amount:

Rs.5,000/- ( plus in multiple of Re. 1)

Fund Manager:

Harish Patwardhan

Benchmark Index:

Nifty Small Cap 250 Total Returns Index

Why Small Cap?

Small Cap stocks usually outperform large-cap stocks over long investment horizon. In the last 15 years, the BSE Small-Cap Index rose 16.5 times, while the BSE Sensex (index of the largest 30 stocks by market cap) rose 11.3 times. Even in a mature market like the US, small-cap stocks have outperformed large cap in the last 15 years.

small vs global

Over long tenors, fundamentals have driven small-cap performance. Quality small-cap stocks have delivered stronger earnings per share growth compared to their large-cap counterparts. Stronger earnings growth leads to small-cap outperformance in the long term.

The average number of analysts covering large-caps is 30 and mid-caps is 15. Small-caps are relatively under-researched. Out of 870 stocks in BSE Small-cap Index. 210 stocks are not covered by any analyst 398 stocks are covered by less than 5 analysts. This gives fund manager an edge in spotting good businesses early and generate higher alpha.

analyst
The universe of stocks in large and mid-cap segments has shrunk post-SEBI’s mutual fund scheme categorization. While there are only 100 stocks in large-cap and 150 stocks in midcap segments, there are more than 2,500 stocks in the small-cap segment. The broader investment opportunity in the small-cap segment may increasingly lead fund managers to invest in these stocks to create alphas. Higher demand for small caps can benefit small cap investors. Edelweiss estimates that over Rs 1 Lakh crore can flow into the small-cap segment (see chart below).

Flow-Small-Cap-Segment

Small caps have a strong presence in certain industry sectors with high growth potential, where large and midcap stocks have a much smaller presence, e.g. chemical companies, staffing companies etc. Investors can leverage the growth potential of these sectors by investing in small caps.

Why invest in small cap now?

Historical data shows that deep corrections provided attractive investment opportunities in the small-cap segment. When the Nifty Small Cap 250 Index fell by 20 to 30% in the past, the subsequent 5-year average CAGR was around 14%. When the small-cap index fell by 10 to 20%, it gave 15% CAGR returns in the next 5 years.

Over the past 1 year, 78% of small-cap stocks have corrected by more than 30% from their peaks and 25% small cap stocks have fallen more than 50% from the peaks. Going by historical evidence this may provide attractive investment opportunities.

fall

small industrial

Historical data shows that small caps bounce back stronger after underperforming large caps (see the chart below). The relative underperformance of small cap in 2018 has been the most severe in the last 10 years, signalling attractive investment opportunities in this segment now.

0 (5)

Sharp price cuts improve risk-return trade-off for quality stocks (stocks which deliver strong EPS growth). The price correction in quality small-cap stocks over the past 1 year is likely to improve the risk-reward in their favor.

Why invest in Edelweiss Small Cap Fund?

The fund has a unique portfolio allocation strategy to ensure performance consistency.

The fund manager will invest in 4 different buckets – strategic (core portfolio for buy and hold), tactical (to leverage cyclical opportunities), options (high risk/return) and defensive (to provide stability).

The fund will focus on liquidity (to reduce impact cost), diversification (to manage concentration and liquidity risk) and rigorous quality check (management quality and earnings visibility).

The fund manager (Harish Patwardhan) has a long and successful investment track record. Edelweiss Midcap Fund managed by Mr Patwardhan has outperformed its benchmark index across different time-scales; 23% annualized returns in the last 5 years.

Complete Factsheet of Harish Patwardhan

Download (PDF, 100KB)

The fund manager will follow a process driven investment approach backed by in-depth research capabilities of the AMC.

Who should invest?

Patience: Investors who want to invest for more than 5 years and can be patient during volatile markets.

volatile

Risk Appetite: Investors who have higher risk appetite and want aggressive
portfolio allocation.

Asset Allocation: Investors who are looking to invest in small-caps
as a part of asset allocation

Reduce timing risk through STeP :

Though small stocks have corrected sharply over the past 12 months, further corrections cannot be ruled out. Edelweiss’ STeP investment facility available with this NFO will enable you to invest systematically in the fund in staggered based on price and time triggers.

If you opt for STeP, 20% of your subscription amount will be invested in the Small Cap Fund and the balance in the Edelweiss Liquid Fund. The investment in the liquid fund will be transferred to the Small Cap Fund in 4 instalments on monthly dips. Each transfer will be triggered if there is a 3% correction in the small-cap index or the last date of the month if the trigger is not hit during the month. The STeP facility will allow you to take advantage of volatility when investing in a lump sum.

“Investing is the intersection of economics and psychology.” – Seth Klarman

 

Note: Mutual fund investments are subject to market risks read all scheme related documents carefully.

DISCLAIMER:

No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor before making any actual investment decisions, based on information published here.

Six mutual fund schemes under watch and downgraded one of these due to their exposures to the special purpose vehicles of IL&FS.

On Tuesday, rating agency Icra placed ratings of six mutual fund schemes under watch and downgraded one of these due to their exposures to the special purpose vehicles of IL&FS.  

A cash flow generating IL&FS SPV has chosen to default. Investors are now worried about more such defaults.

The schemes that were put under ratings watch are HDFC Short Term Debt Fund, HDFC Banking and PSU Debt Fund, UTI Banking and PSU Debt Fund, UTI Bond Fund, UTI Dynamic Bond Fund and Aditya Birla Sun Life Short Term Opportunities Fund. Icra also downgraded Birla Sun Life Short Term Opportunities Fund from AA+mfs to AAmfs.  

ILFS1

ILFS2

UTI MF’s schemes have an exposure of about Rs 559 crore to the secured bonds issued by Jorabat Shillong Expressway (JSEL) as on January 21, 2019. According to debt fund managers, in a normal course, the interpretation is to keep the cash flows within the common pool until the situation settles down, but this interpretation is not applicable to the SPVs.

Fund managers say concern on repayments of IL&FS SPVs stems from another ‘ring-fenced’ SPV of IL&FS Group — Jharkhand Road Projects Implementation (JRPICL) — not paying coupon payments to its bondholders due on January 21. The NCLAT moratorium order on IL&FS and its group entities dated October 15 was cited as a reason for the non-payment.

Among the three fund houses under ratings watch, UTI MF has the largest exposure (as a percentage of its schemes) to IL&FS SPV.

According to Icra note, UTI Banking and PSU Debt Fund, UTI Bond Fund and UTI Dynamic Bond Fund’s exposure to JSEL stood at 6.87 per cent, 5.98 per cent and 6.25 per cent of their respective asset under management (AUM) as on December 31, 2018.

The fund house will value its investments in JSEL at a price based on the fair value principle in the light of recent developments and downgrades of similar structures. The fund house re-iterated JSEL’s capability to service its own debt.

hdfc

Meanwhile, HDFC MF has decided to take a 25 per cent markdown on its exposures to Hazaribagh Ranchi Expressway (HREL) considering the high likelihood of rating downgrade of HREL to below investment grade.

The exposure of HDFC Short Term Debt Fund to HREL is at 0.55 per cent of its AUM, while HDFC Banking and PSU Debt Fund’s exposure is 0.29 per cent of its AUM to HREL, according to the Icra note.

Birla Sun Life’s Short-Term Opportunities Fund’s exposure to JRPICL is at 1.15 per cent of the scheme’s AUM.

What I have understood

ILFS SPV – Curious case of default: What I’ve understood – given in this thread, The strange case of Jharkhand Road Projects Implementation Co Ltd an SPV of ILFS having cash and yet not paying creditors. The co. receives annuity every quarter from the Jharkhand Govt for roads built.

Rs. 75 crores of int and principal payment were due on 21.1.19. AND NOT PAID. There are currently Rs 450 crores lying in an escrow account out of which the payment was to be made. Usually, for financing such projects, an extra amt is kept in a DSRA account.

This DSRA is a debt servicing account to service debt if the annuity is delayed. With all this, yet the JRPIC chose not to pay Rs75 crores (remember 450 crores is ready to cash lying in the bank/liquid funds).

The annuity payments by the Govt of Jharkhand go to pay maintenance cost of the roads and principal and interest to creditors. What is left goes to the promoters after paying creditors. The revenue stream Is constant. The Jharkhand Govt has been paying regularly.

The company defaulted because of interpretation of an NCLAT order on ILFS and its companies by the current management. The NCLAT order put a moratorium on debt payments of companies and enforcement of assets by creditors.

The moratorium of NCLAT probably meant that creditors could not sell the security for loans of the ILFS companies and not meant to stop debt servicing of these SPVs which were receiving annuities regularly and servicing debt.

Now the management has taken a call that this applies to regular debt even from companies, SPVs that are servicing debt. So the creditors who could easily withdraw from the escrow account now cannot do so.

So curious case the State Govt is paying annuities regularly, there is money lying in the escrow account and the creditors have not received payment. Jharkhand Road Projects Implementation Company Ltd. is one of the SPVs within the IL&FS Group.

New National Pension System ( NPS ) withdrawal rules

The Pension Fund Regulatory and Development Authority (PFRDA)  has relaxed partial withdrawal norms for NPS subscribers. With this, NPS subscribers can withdraw up to 25% of their money from their corpus thrice in their lifetime.

The first withdrawal is now permissible after three years from the date of joining. Earlier, NPS subscribers were allowed to withdraw their corpus after completion of 10 years.

This amount will be tax-free in the hands of subscribers.

New Image

Currently, NPS subscribers can withdraw partially for higher education or marriage of their children, fund their entrepreneurial dream or professional skill development, construction or purchase of first house and treatment of specific ailments like cancer, kidney failure, paralysis etc.

Like NPS, EPFO also allows partial withdrawals. However, since there is no such limit on withdrawals, many people pull out their money from their EPFO account. As a result, many subscribers are left with a small corpus for their post-retirement days defeating the very purpose of EPFO.

Another key development is the choice of a pension fund for central government employees. Now, such employees can choose pension funds including private sector pension funds, with the change of fund being allowed once every year.

Partial withdrawal is permitted under the following conditions

1. For higher education and marriage of children including a legally adopted child.

2. For purchase or construction of a residential house or flat. In case, the subscriber already owns a house other than ancestral property, either individually or in the joint name, no withdrawal is permitted.

3. If the subscriber, their legally wedded spouse, children, including a legally adopted child or dependent parents suffer from any specified illness, which shall require hospitalization and treatment in respect of diseases such as Cancer, Kidney Failure (End Stage Renal Failure), Primary Pulmonary Arterial Hypertension, Multiple Sclerosis; Major Organ Transplant, Coronary Artery Bypass Graft; Aorta Graft Surgery; Heart Valve Surgery; Stroke; Myocardial Infarction; Coma; Total blindness; Paralysis; Accident of serious/ life-threatening nature; Any other critical illness of a life-threatening nature, withdrawal is allowed.

4. To cover expenses by a subscriber for skill development/re-skilling or for any other self-development activities.

5. To cover the expenses by a subscriber for the establishment of own business or any start-ups.

6. To cover medical and incidental expenses arranging out of disability or incapacitation suffered.