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Best small and mid cap mutual fund managers 2019

Here are the top 5 fund managers in the small and mid cap category who have created the most wealth for investors.

, ET Bureau|
Updated: Sep 02, 2019, 09.26 PM IST
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Read on to know how the best investing brains in the country have negotiated the tides of the market.
ET Wealth together with Morningstar India have selected and ranked India's best equity fund managers, across categories, based on their five-year risk-adjusted returns. Here are the top 5 in the small and mid cap category who have created the most wealth for investors.

These managers have proved their mettle while dealing with stock market volatility and have delivered consistent returns over the years. Read on to know how the best investing brains in the country have negotiated the tides of the market.

1. Shreyash Devalkar

Age: 40 years
Education: B.E. (Chemical Engineering), Masters In Management Studies
Experience: 14 years

Axis Mutual Fund
  • 5-year asset weighted return 18.48%
  • Average 5-year AUM Rs 1,003 crore
  • Risk adjusted returns 0.88

Fund managed: Axis Midcap Fund
AUM (Rs cr) 2,634
3-Year 9.73
5-Year 11.62

How he has managed the fund
Shreyash Devalkar says a lot of caution and spadework is needed while navigating the mid-cap terrain. Gauging the promoters’ merit and execution capabilities is critical for this segment. He prefers to align with businesses that either have leadership position within a niche area or are capable challengers in a larger playground. Clearly, differentiating between growth and sustainability has been a central pillar to his approach to this segment.

Devalkar’s strict focus on quality has led to a very compact portfolio featuring only the highest conviction bets scoring high on different aspects of quality. Across time periods, he has been effective in taming the fund’s risk profile, offering superior downside protection in a high-risk segment. Not surprisingly, the fund boasts the best risk-return profile among peers in its category.

Stock market outlook
a) What the market tells me

The market was fully discovered across market cap segments by 2017 end. After that, across large, mid and small-caps, there are a set of stocks which are giving returns while rest are underperforming. In the past three years, the percentage of stocks that have given good returns (more than 10% CAGR) in all three buckets are almost the same. Contrary to what benchmark indices show, mid-caps as a category has not underperformed large-caps. The market will get more discerning and objective as far as quality and growth is concerned.

b) My portfolio is aligned for
We continue to own quality and growth stocks across portfolios. We are more objective on the philosophy. The number of sectors that are doing well has come down in the past one year. For example, auto ancillaries in the mid-cap space are getting impacted due to the slowdown. Some NBFCs have also slowed down as a result of this. Hence, we are focusing more on sectors and companies which are likely to deliver relatively higher earnings growth. Accordingly, the portfolio is getting more concentrated and nimble.

c) Promising theme for the next 3-5 years
Mid-caps normally give uneven returns due to stocks getting discovered and stronger earnings growth due to their niche business and low base. The investment theme for mid-caps has always been India-centric businesses and mostly consumption focused companies, including retail banks, NBFCs, durables, staples, auto and discretionary.

Top sector bets
Financial Services 24.73%
Consumer Cyclical 19.19%
Technology 12.29%

Top stock picks
Info Edge (India) 6.17%
City Union Bank 5.19%
Avenue Supermarkets 4.98%

Also read: Best equity mutual fund managers 2019: Ranking by ET-Wealth-Morningstar

2. R. Srinivasan


Age: 48 years
Education: M.Com , MFM
Experience: 27 years

SBI Mutual Fund
  • 5-year asset weighted return 20.94%
  • Average 5-year AUM: Rs 800 cr
  • Risk adjusted returns 0.80

Fund managed: SBI Small Cap Fund

AUM (Rs cr) 2,256
3-Year 10.80
5-Year 18.29

How he has managed the fund
When mid-and-smallcaps were rallying a few years ago, R. Srinivasan kept a wary eye on the rising valuations and heavy inflows into his fund (earlier SBI Small & Midcap). As inflows rose beyond the fund’s capacity to absorb them, it stopped fresh investments. However, following the recategorisation, when the fund adopted the small-cap mandate, it found access to a larger investible universe with higher market capitalisation and was partially reopened in mid-2018.

Srinivasan also spread out the portfolio to soften the fund’s risk profile. He prefers companies with some competitive advantage, scalability, better cash conversion and longevity. He also seeks higher margin of safety, which he reckons is critical in this segment. This has ensured a healthy risk-return profile.

Stock market outlook
a) What the market tells me

Adjusted for risk, the market has just about started to look attractive in the small cap space.

b) My portfolio is aligned for
We are looking for three basic characteristics – a good business, a good management and a good price. It’s about weighing these characteristics for their intensity or closeness to where you want them to be and choosing the right combination.

c) Promising theme for the next 3-5 years
This is a pure bottom-up philosophy.

Top sector bets
Consumer Cyclical 20.62%
Industrials 20.32%
Basic Materials 18.43%

Top stock picks
JK Cement Ltd 4.61%
Hawkins Cookers 4.30%
Dixon Techologies 3.55%

3. Pankaj Tibrewal

Age: 40 years
Education: Commerce graduate from St. Xavier‘s College, Kolkata and holds Masters in Finance from Manchester University.
Experience: 18 years

Kotak Mutual Fund
  • 5-year asset weighted return 14.83%
  • Average 5-year AUM Rs 2,445 cr
  • Risk adjusted returns 0.58

Funds managed
Kotak Small Cap Fund
AUM (Rs cr) 1,121
3-Year 2.35
5-Year 10.28

Kotak Emerging Equity Fund
AUM (Rs cr) 4,321
3-Year 6.00
5-Year 13.85

How he has managed the funds
Pankaj Tibrewal maintains a strict focus on protecting the downside and minimising errors. He refuses to deviate from the chosen investment philosophy, insisting that this consistency will reflect in the outcome later. He prefers to align with businesses boasting a high quality franchise and a tested management with the ability to scale up while maintaining capital efficiency.

Tibrewal lays strong emphasis on maintaining a healthy liquidity in the portfolio, reflected in the sizing and nature of his bets. He was early to spot the opportunity in specialty chemicals and select contra bets in cement and industrials worked well. He avoids firms with highly leveraged balance sheets to side-step the traps camouflaged as growth. Tibrewal also believes in healthy diversification to minimise risk, reflected in the superior downside capture in his fund.

Stock market outlook
a) What the market tells me

Post the sharp correction in mid and small-cap stocks over the last 18 months, we believe the performance between mid-small caps vis-à-vis Nifty is at historical extremes. History suggests that such divergences don’t exist for too long. Post such large underperformances, mid-small caps tend to outperform large-caps over the next 12-18 months.

b) My portfolio is aligned for
We are using this correction and volatility as an opportunity to own quality businesses available at decent valuations from a medium to long term perspective.

c) Promising theme for the next 3-5 years
We believe cement, private sector corporate lenders and early cycle capital good companies can be interesting investment themes for next 3-5years.

Top sector bets
Basic Materials 26.40%
Consumer Cyclical 17.81%
Financial Services 17.56%

Top stock picks
PI Industries Ltd 3.52%
Supreme Industries 3.28%
AU Small Finance Bank Ltd 3.16%

4. R. Jankiraman


Age: 48 years
Education: BE, PGDM (IIM Bangalore)
Experience: 22 years

Franklin Templeton Mutual Fund
  • 5-year asset weighted return 13.53%
  • Average 5-year AUM Rs 9,572 cr
  • Risk adjusted returns 0.54
Funds managed
Franklin India Smaller Companies Fund
AUM (Rs cr) 6,729
3-Year 1.73
5-Year 10.40

Franklin India Prima Fund
AUM (Rs cr) 6,686
3-Year 5.49
5-Year 12.24

How he has managed the fund
Till a few years ago, the very high quality businesses offered healthy earnings growth. But now, even this creamy layer has been buffeted by the slowdown in the economy. While there has been some correction in prices in this segment, the layer below the highest quality has seen a sharper correction, points out R. Janakiraman. He finds that even as the high quality segment now trades at fair prices, the bigger opportunity exists one notch lower down the quality ladder.

Janakiraman’s focus during this period has been towards making the portfolio robust and compact, improving its quality profile without affecting its risk positioning. Being a seasoned campaigner in the mid and small-cap segment, Janakiraman knows better than to be adventurous in this space. Cutting down on risks has taken precedence over identifying the next big idea.

Stock market outlook
a) What the market tells me

It is evident that we are in the midst of a broadbased slowdown. Risk aversion has risen in the lending side and is unlikely to wear off simply on the back of better liquidity. A reasonably satisfactory monsoon, social welfare transfer payments and stable crop prices should bring about a stronger rural demand.

b) My portfolio is aligned for
The ongoing weakness in the midcap segment has made the valuations of many such businesses quite attractive. The fund has either upsized such positions or has introduced a few new stocks. The intent is not to time the recovery, but to use the downcycle to make the portfolio more robust.

c) Promising theme for the next 3-5 years
Apparels and chemicals are two big opportunities. Online businesses or aggregators, logistics and allied categories are likely to see good growth from rise in smartphone and broadband penetration. Healthcare likely to see sustained growth.

Top sector bets
Financial Services 20.40%
Basic Materials 18.58%
Consumer Cyclical 14.40%

Top stock picks
HDFC Bank Ltd 4.08%
Voltas Ltd 2.32%
Kotak Mahindra Bank 2.29%

5. S.N. Lahiri

Age: 52 years
Education: B.E (Mechanical), PGDM – (IIM Bangalore)
Experience: 29 years

L&T Mutual Fund
  • 5-year asset weighted return 14.69%
  • Average 5-year AUM Rs 3,496 cr
  • Risk adjusted returns 0.54

Funds managed
L&T Midcap Fund
AUM (Rs cr) 4,805
3-Year 7.26
5-Year 13.05

L&T Emerging Businesses Fund
AUM (Rs cr) 5,611
3-Year 8.03
5-Year 12.94

How he has managed the fund
Amid the high degree of polarisation even in mid and smallcap indices, S.N. Lahiri has kept re-evaluating existing ideas. He acknowledges that valuations got too expensive earlier at a time when earnings were not quite coming through. In such a situation, it helps to be index agnostic and take a pure bottom-up approach, he insists. He has also been inclined to diversify more heavily than before given the higher degree of uncertainty.

Lahiri feels that the current sell-off is justified in some names, but overdone in others. In hindsight, he feels he could have sold some of the better performers, but maintains that businesses with inherent strengths— differentiated products, wide moats, pricing power—have the ability to come back stronger. Lahiri places a lot of emphasis on bringing consistency to fund returns rather than focusing on creating huge alpha.

Stock market outlook
a) What the market tells me

The recent correction in the equity markets has provided attractive entry points for quality companies available at reasonable valuations, more so in the mid- and small-cap space. Earnings revival and resolution of NPAs in the banking system will be the key drivers for the markets.

b) My portfolio is aligned for

Our portfolio focus is aligned to companies that have a strong corporate governance framework along with a good management track record. Additionally, we look for three filters in such companies: Entry barriers, scalable opportunities and reasonable price.

c) Promising theme for the next 3-5 years
We are positive on the infrastructure segment at this point in time. Order book accretion, increase in capacity utilisation and strong execution have been driving the sector so far.

Top sector bets
Basic Materials 21.58%
Consumer Cyclical 19.66%
Industrials 15.21%

Top stock picks
Ramco Cements Ltd 2.60%
City Union Bank Ltd 2.30%
Abbott India Ltd 2.00%

(Source: Mornigstar India)
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