SBI Small Cap Fund Direct Plan Growth INF200K01T51

The SBI Smallcap Fund plies an absolute return strategy that focuses on core competency, competitive advantage in business, return on capital growth, management, and valuations. The endeavor here is to scout stocks that are able to meet their threshold in terms of the minimum growth in terms of CAGR and a consistent ROC over the investment horizon.

The fund follows a blend of growth and value style of investing and will follow bottom-up investment strategy for stock selection. R.Srinivasan focuses on finding good businesses and good management at attractive valuations. The manager is quite patient with his holdings but doesn’t want to compartmentalize his approach in the "buy-and-hold" bucket. Therefore, immense focus is done during the evaluation phase, which involves detailed study on the sector and company by the analysts, channel checks, and so on. The intention is to try to evaluate and weed out as many companies as possible at this stage itself, through thorough due diligence.

Consistency and stability of framework met with strong execution are the positive attributes of this fund. Srinivasan has not deviated from his framework even during difficult periods of underperformance, which is a positive. He is quite at home when he manages a concentrated portfolio and therefore would ideally like to have exposures in business that can have a meaningful impact in the portfolio. However, given the fund’s large size, small allocations in the fund can potentially lead to a high ownership toward a single company, thereby affecting the liquidity of the fund, which is the case now.

Srinivasan is an excellent stock-picker and has managed this fund well from a framework perspective. The experienced analyst team at SBI also helps the managers form opinions on stocks and sectors. While there are many positives about this fund’s process, our concerns around the fund’s liquidity are an underpinning factor and therefore we score the Process Pillar at Average.

R.Srinivasan prefers to have a relatively concentrated portfolio of sub-50 names with a high active share. He follows a benchmark-agnostic approach that is rooted in pure bottom-up stock-picking.

Srinivasan is cognizant of liquidity issues in the fund with respect to high ownership in some companies by the fund or fund house. He therefore tries to make sure that the thesis of investing in those companies, from the perspective of management quality, valuation, or growth visibility, is very strong. Srinivasan is quite willing to back his conviction and invest in business over long periods (or until the thesis plays out). This is also reflected in the low turnover of the portfolio.

Srinivasan by and large has always tried to invest only in small-cap companies but at times, because of market scenarios, has taken allocation into mid-caps. This occurs when he feels valuations are too frothy. That said, the average market cap of the fund is below the category average and therefore the essence of the fund to invest in small caps holds true.

Currently, the fund is within the mandated minimum 65% allocation in small caps. That said, Srinivasan would like to increase this when the market corrects substantially, and for that he has not been shy of building cash in the portfolio.