Prime Recommendation: Union Small Cap – A small-cap fund without size constraint

Whatsapp share
Tweet it out
Share on FB
Post on LinkedIn

Small cap companies are not particularly attractive post the March lows. And yet, after almost 2 years of underperformance, this segment is seeing a new set of companies rallying swiftly, to make up for the years of suppressed performance. And several of them are backed by fundamentals.

 If you therefore decide to ride this new wave with a small-cap fund, it is not that easy. You may have to wonder whether the fund you pick will restrict inflows in a while or suffer in performance if its AUM grows rapidly.

So, this time around, in our quarterly review, we dug deeper into the small-cap space to see if we can overcome this constraint without compromising on the quality of the portfolio. And we think we have the one.

Why this is a risky bet and why we chose it

Union Small Cap is the new addition to our Prime Funds’ list. It is a high-risk bet, even in the small-cap space, for the following reasons:

  • it is an emerging performer and not time-tested.
  • It has seen a marked improvement since the addition of seasoned fund manager Vinay Paharia in April 2018. Its performance may therefore hinge on fund management stability.
  • It is from a fund house that, not so long ago, has been at the bottom of performance chart across equity products but seeing an uptick now. The longer-term rolling returns chart below will tell you the fund’s noticeable underperformance over the category average and how this has steadily narrowed and then moved to a zone of outperformance now.

These risks notwithstanding, we added Union Small Cap for the following reasons:

  • Steady improvement in our ratings chart, buttressed by a mix of high quality and high growth companies in its portfolio.
  • Addition of seasoned fund manager Vinay Paharia in April 2018 and a visible difference in portfolio make up and performance a year after his entry.
  • A nimble AUM size that allows navigation of the small-cap space, without fear of impact cost or liquidity.

These points are detailed below.

Turnaround in performance

Union Small Cap beat the small-cap category average 87% of the times when 1-year returns were rolled daily between 2016-20. As the chart below will show you, the fund was marginally underperforming SBI Small Cap and significantly trailing Axis Small Cap. This gap started narrowing in 2020. The fund raced ahead post the correction.

But the chart will also tell you that there is little comfort to take from its past performance. What lends comfort is the changes it made to its portfolio, especially from mid-2018, after Vinay Paharia joined the team. Portfolio turnover can give a good insight into changes that a new fund manager may bring about. Between July 2018 and June 2019, the portfolio turnover stood at 92%, far higher than the average 48% for the six months ending March 2018 (before the entry of the new fund manager cum CIO).  

In the revamped portfolio, quality and growth took precedence over valuation. And we think this laid the foundation for the fund’s recent outperformance. While many stocks were added, stocks with ripe valuations or underperformers also exited the portfolio over the above-mentioned period. As a result, while the fund did fall more than top peers in the March 2020 correction, it rose quickly in the ensuing rally, thanks to the quality portfolio that we discuss in the next section.

Resilient portfolio

If you scan the portfolio of Union Small Cap, you will see quite a few stocks that doubled in the last 6 months. You will find strong resilience in the earnings of these stocks even in the Covid-19 hit June quarter.

About 30% of the stocks saw a growth in earnings in the June quarter over a year ago, suggesting that the stocks’ rally was backed by sound growth stories. Pharma and healthcare stocks such as Alembic Pharmaceuticals, IPCA Laboratories and Laurus Labs, JB Chemicals & Pharmaceuticals, chemical plays such as PI Industries, tech plays such as Indiamart Intermesh, Birlasoft or Tata Elxsi are few examples of an earnings resilient story that the fund has drawn for itself over the past year and a half.

The current macro environment offers a good opportunity to test a company’s resilience in a slowdown phase and on this metric, the fund’s portfolio offers comfort that it has been filtered with sound metrics. While earnings for the fund’s portfolio fell by 23% over a year ago in the June quarter, it was a far better show than the 50% earnings fall of bellwether companies in Nifty 50.

Overall, this portfolio rehash along with tactical opportunities in the form of IPOs helped the fund shore up performance.

No size constraint

You may be aware that many of the top performing small-cap funds have restrictions on inflows. Higher inflows in small-cap funds cause 2 kinds of challenges to fund houses: one, finding quality opportunities in the small-cap space; two, deploying money or exiting stocks without incurring heavy impact cost. Union Small Cap scores on this front. Sample the data below of AUM size of some of the popular funds.

You will see that Union Small Cap has significant leeway to navigate this space without fear of stock liquidity. To put this in perspective, the fund can technically liquidate its entire portfolio (based on individual stock volumes and its own size) in 3.2 days, as opposed to 13 days for Nippon Small Cap, 24 days for Axis Small Cap or 39 days for HDFC Small Cap.

Suitability

We have highlighted the risks in this fund upfront. The reason for the same is that you should best view this as a dark horse bet. Take not more than 5-8% exposure and that too through SIPs and see how it performs. We will not hesitate to call out on any management change or changes in the AMC itself. Hence do not view this as a ‘buy & hold’ long-term candidate. Check for our review quarterly or half yearly on our MF Review Tool.

As a fund with small AUM size, expense ratio is not low. Go for the direct route where possible.

With inputs from Anush Raj P

Share via Whatsapp
Tweet it out
Share on FB
Post on LinkedIn

More like this

Please note that any specific queries on any of our recommendations will be answered ONLY through email. If you are a subscriber, please mail contact@primeinvestor.in.  Only general queries or discussions will be answered through the comment section of the blog. For full details, please refer to this post – How to communicate with PrimeInvestor.

24 thoughts on “Prime Recommendation: Union Small Cap – A small-cap fund without size constraint”

  1. I already have 83% of my MF portfolio allocated to large cap funds. So i thought of diversifying to some mid and small cap funds. However with so many companies going bust and a possible covid 3rd wave that might put further strain on businesses, is it safe to invest in mid-cap funds now? Or should i stick to large cap funds for now?

Comments are closed.

Register for FREE!

Gain instant access to more PrimeInvestor articles, researched products, and portfolios

The essence of PrimeInvestor

Register for FREE!

Gain instant access to more PrimeInvestor articles, researched products, and portfolios

Legal Disclaimer : PrimeInvestor Financial Research Pvt Ltd (with brand name PrimeInvestor) is an independent research entity offering research services on personal finance products to customers. We are a SEBI registered Research Analyst (Registration: INH200008653). The content and reports generated by the entity does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. All content and information are provided on an ‘as is’ basis by PrimeInvestor Financial Research Pvt Ltd. Information herein is believed to be reliable but PrimeInvestor Financial Research Pvt Ltd does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. The services rendered by PrimeInvestor Financial Research Pvt Ltd are on a best-effort basis. PrimeInvestor Financial Research Pvt Ltd does not assure or guarantee the user any minimum or fixed returns. PrimeInvestor Financial Research Pvt Ltd or any of its officers, directors, partners, employees, agents, subsidiaries, affiliates or business associates will not liable for any losses, cost of damage incurred consequent upon relying on investment information, research opinions or advice or any other material/information whatsoever on the web site, reports, mails or notifications issued by PrimeInvestor Financial Research Pvt Ltd or any other agency appointed/authorised by PrimeInvestor Financial Research Pvt Ltd. Use of the above-said information is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. All intellectual property rights emerging from this website, blog, and investment solutions are and shall remain with PrimeInvestor Financial Research Pvt Ltd. All material made available is meant for the user’s personal use and such user shall not resell, copy, or redistribute the newsletter or any part of it, or use it for any commercial purpose. PrimeInvestor Financial Research Pvt Ltd, or any of its officers, directors, employees, or subsidiaries have not received any compensation/ benefits whether monetary or in kind, from the AMC, company, government, bank or any other product manufacturer or third party, whose products are the subject of its research or investment information. The performance data quoted represents past performance and does not guarantee future results. Investing in financial products involves risk. Investments are subject to market risk. Please read all related documents carefully. As a condition to accessing the content and website of PrimeInvestor Financial Research Pvt Ltd, you agree to our Terms and Conditions of Use, available here. This service is not directed for access or use by anyone in a country, especially the USA, Canada or the European Union countries, where such use or access is unlawful or which may subject PrimeInvestor Financial Research Pvt Ltd or its affiliates to any registration or licensing requirement.

Aditya Birla Mutual Fund • Axis Mutual Fund  Baroda Mutual Fund BNP Paribas Mutual Fund • BOI AXA Mutual Funds Canara Robeco Mutual Fund • DSP Mutual Fund  • Edelweiss Mutual Fund
Essel Mutual FundFranklin Templeton Mutual FundHDFC Mutual FundHSBC Mutual FundICICI Mutual FundIDBI Mutual FundIDFC Mutual FundIIFL Mutual FundIndiabulls Mutual FundInvesco Mutual FundITI Mutual FundKotak Mahindra Mutual FundL&T Mutual FundLIC Mutual FundMahindra Mutual FundMirae Asset Mutual FundMotilal Oswal Mutual FundNippon India Mutual FundPGIM Mutual FundPPFAS Mutual FundQuant Mutual FundQuantum Mutual FundSahara Mutual FundSBI Mutual FundShriram Mutual FundSundaram Mutual FundTata Mutual FundsTaurus Mutual FundsUnion Mutual FundsUTI Mutual FundsYes Mutual Funds

Equity: Large Cap Funds | Mip Cap Funds | Large And Mid Cap Funds | Small Cap Mutual Funds | Contra Mutual Funds | Dividend Yield | Focused Mutual Funds | Find Top Index Funds | Best Sector Funds | Thematic Mutual Fund | Best Value Mutual Funds | Equity Linked Savings Scheme | Tax Saving Funds

Debt: Banking And PSU Funds | Corporate Bond Funds | Credit Risk Funds Mutual Funds | Dynamic Bond Funds | Floating Rate Funds | Gilt Mutual Funds India | Find Top Liquid Funds In India | Long term debt funds | Low Duration Funds Debt Funds | Medium Duration Debt Funds | Medium To Long Duration Funds | Money Market Debt Funds | Overnight Debt Funds | Short Duration Debt Funds | Ultra Short Term Debt Fund
Hybrid: Aggressive Hybrid Funds | Arbitrage Mutual Funds | Balanced Advantage Mutual Funds | Conservative Hybrid Funds | Dynamic Asset Allocation | Equity Saving Funds | Multi Asset Funds | Multi Asset Allocation
Mutual fund rolling returns by category: Balanced Advantage | Conservative Hybrid Fund | Corporate Bond | Dividend Yield | Dynamic Bond | Equity Linked Savings Scheme | Floating Rate | Index Funds | Large and Midcap fund | Large Cap Fund | Liquid funds | Low Duration | Mid Cap Fund | Multi Cap Fund | Short Duration | Small cap Fund | Solution Oriented – Childrens Fund | Ultra Short Duration

Login to your account
OR