Below is the views on DSP Blackrock stopping fresh flow to the Microcap Fund by Mr. Himanshu Srivastava, Senior Analyst Manager Research, Morningstar Investment Adviser India
In our opinion, the decision of DSP BlackRock Mutual Fund to stop fresh inflows into DSP BlackRock Microcap Fund is a welcome move and a step in the right direction.
Over the last three years, the fund has witnessed phenomenal increase in its asset base. In August 2013, just before the start of the small/mid-cap rally in the Indian equity market, the fund’s size was INR 307 crores, which over a period of next three years swelled to INR 4,323 crores (as of December 2016), a jump of an astounding 1,308% in absolute terms. However, during the course of time, the fund house has restricted inflows into the fund twice. First time in September 2014, it had put a restriction of `INR 2 lakh for daily lump sum subscription and reduced it further to INR 1 lakh in August 2016.
The surge in its asset base could be attributed to Vinit Sambre’s superior stock selection and execution capabilities, which resulted in the fund delivering a superlative performance. Intensive research forms the core of Sambre’s investment style. He plies a bottom-up, buy-and-hold approach to picking stocks, scouting for growth-oriented companies that have sustainable competitive advantages over their peers and are leaders in their industries. Most importantly, he has a quality focus and invests only when he is comfortable with a company’s management and its capabilities.
Why the decision to stop the flows completely?
Bigger and growing fund size, particularly for a small/mid-cap fund, can pose challenges to the fund in the form of market-impact cost and opportunity cost.
Given the run up in the small/mid-cap space, it has become increasingly difficult for the manager to find investment worthy stocks available within his investment universe and which also passes the muster on his stringent stock selection parameters. The fund’s investment universe comprises of stocks beyond the top 300 companies by market capitalization. Most of these companies have seen huge surge in their valuations thus restricting the investment universe further. As the fund size grows, it becomes difficult for the manager to buy a sizeable position in a company to have a meaningful impact on the fund. All these factors combined has made it difficult for the manager to prudently deploy fresh flows that too on a timely basis.
Illiquidity is another area of concern for small/mid-cap funds. During market downturn, it becomes difficult for the manager to offload illiquid stocks due to lack of adequate liquidity in the system. This can adversely impact the fund’s performance.
Due credit should also go to the fund house for taking this decision which in our view is an investor friendly move. At Morningstar we believe that DSP BlackRock Investment Managers is one of the best asset managers in the country and they have proven us right once again.
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