Asset Management major DSP BlackRock Investment Managers has decided to suspend fresh flows into its popular Micro Cap fund from February 20, 2017, citing the need to protect investors’ interests by restricting large inflows.
Its move has earned the approval of analysts, who believe it is the right decision given its asset size’s rapid expansion, which in turn is driven by the fund’s impressive returns record – its 3-year and 1-year returns stand at 45 and 49 per cent respectively.
In a short span of time, the small and mid-cap fund has seen a phenomenal rise in its assets under management (AUM), which grew to Rs 4,780 crore in January. “There is a possibility that large inflows into the scheme may prove detrimental to the interest of the existing unit holders,” the fund house said in an official statement justifying its decision. “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,” explained Himanshu Srivastava, Senior Analyst and Manager-Research, Morningstar Investment Adviser India.
Investment pause
DSP BlackRock’s senior vice-president and fund manager Vinit Sambre, who is credited with the scheme’s runaway success, also highlighted the challenge of liquidity posed by its current size. “It is challenging to incrementally build positions, i.e. to increase stock weightage of companies to a meaningful size in the portfolio,” said Sambre.
The suspension in transactions will be applicable to all fresh subscriptions, including systematic investment plans (SIP), systematic transfer plans (STP), dividend transfer plans (DTP) and switch-ins. The cut-off timing to receive fresh applications is February 17, after which the scheme will be closed for subscriptions unless and until the AMC decides to review its decision. In the past, the fund house has suspended fresh intakes on two occasions. It initially placed restrictions of Rs 2 lakh on daily lump-sum subscription in September 2014, which was further reduced to Rs 1 lakh in August last year.
The fund house’s latest step has found favour with mutual fund analysts who feel it was needed in the backdrop of sharp 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 Rs 307 crore, which swelled to Rs 4,323 crore in December 2016, a jump of an astounding 1,308 per cent in absolute terms,” pointed out Srivastava. Moreover, the run-up in the small and mid-cap space has made it difficult for the fund manager to find investment-worthy stocks that meet his criteria.
The fund’s investment universe is made up of stocks beyond the top 300 companies by market capitalisation. “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,” pointed out Srivastava. As a result, the deploying fresh flows into stocks that fit his bill were becoming difficult for the fund manager, finally leading to this decision.