The way many investors are reacting to the performance of DSP BlackRock Micro Cap Fund’s “recent performance” is baffling, to say the least, and betrays a lack of method in fund selection, portfolio construction (what is that?) and a lack of understanding of reward and ruin in the equity markets. In this post, I review the performance of DSP BlackRock Micro Cap Fund now known as DSP Smallcap fund
In my fund reviews, I usually only consider long-term past performance (3Y+). I will make an exception for this special fund and use the Fingerprinting Tool for Analyzing Mutual Fund Performance.
First, let us consider why some investors are concerned. This Value Research screenshot says it all.
Using the movable scrollbar at the bottom, you can see that the fund has a poor run of form for the last year or so. If you plot its NAV from Mar 4th, 2016 to Aug 4th, 2017, the outperformance gains have vanished.
Well, it is too short a time to judge and all that sort of thing. The problem is that such logic cannot be appreciated by someone who sees 101% return in 2014 from this fund and assumes that history will repeat. So let me try the fingerprinting tool.
How does fingerprinting work?
Suppose I have the NAV data of a fund and its benchmark.
1 I calculate monthly return of both
2 Find out the difference between fund return and index return when the index return was positive. Call this up-market return.
3 Do the same when the index return was negative and call it down-market return
4 Take the six-month or one-year average of up and down market returns on rolling basis
5 Plot Up-market return (Y axis) vs Down market return (X axis) to create this kind of grid.
There are now four quadrants with four different fund performances. Obviously, we want funds that have data points in the top left quadrant and bottom left quadrant.
The diagonal line is a reference which separates ‘good’/acceptable data points in the top triangle and the borderline/’bad’ data points in the bottom triangle.
DSP Small Cap Fund vs BSE Small Cap TRI
This is the performance fingerprint of the fund with its benchmark. I have marked the years below. In the tool (download it from the above post), you can do a more detailed date analysis.
Look at the remarkable outperformance of the fund in 2014. My guess is that many investors (and advisors?) flocked to this fund looking at this. The fund had a (relatively speaking) “bad patch” in 2015 but has since recovered quite well.
Well, the current performance “is not as spectacular” as 2014, but to expect a repetition is immature and irrational.
The big problem with equity investing is that most people do not have enough money to invest (the sure shot way to build wealth) and wish to compensate for it via returns. They ought to keep in mind that history does not repeat itself, it rhymes (Mark Twain)
DSP Small Cap Fund AUM Breakup
From AMFI, we can see that as on June 2017,
8.11% of AUM comes from retail investors in top 15 cities (direct plan)
3.4% from retail investors in B15 cities (non-major cities) (direct plan)
43% of AUM from top 15 cities (commission plan)
20% of AUM from B15 cities (commission plan)
17% of AUM from high net worth individual in T15 cities (commission plan)
A high net worth individual is one who can invest 25 lakhs year.
T15: top 15 cities that provide profits to MF amcs.
B15: all the rest. Distributors get more commission for selling products here.
Let us please not assume that only those who invested in direct plans are agitated about its recent performance. We need a proper crash for a system reset.
Should I invest in such funds?
There is nothing wrong with having “some” exposure to mid-caps, small-caps and micro-caps. The trouble with these stocks is they have extremely volatile. I would think given the constraints, the DSP Microcap fund manager has done a fantastic job so far. The fund was right to close subscriptions. It is important to remember that multi baggers picks do not sprout all the time. Heavy exposure to funds in this category is suitable only for truly long term goals – 15Y+. For all other time durations, you can add a pinch (if desired). This way, even if it fails, it will not hurt as much.
Seeing the comments about this fund in various forum, it is clear that star rating and the drop of a star are crucial fund selection and performance-worry factors. Microcap fund investors seem to have patience in the micro scale.
I am an investor in this fund, what should I do?
A clear risk management strategy is essential. I see nothing wrong with this fund.
If you can handle downs and ups (more important) and can afford to be patient for years during a sideways market, you can stick to this or such funds.
Otherwise, have a tactical asset allocation strategy in place within the equity space
If you feel the market is overheated (by whatever yardstick), move to large caps. If you think the market has fallen significantly move to lower caps. This way you can dynamically rebalance. This is a risk reduction strategy and not a return enhancement strategy.
My point is, if we have a plan, we will not worry about short-term fall in underperformance.
Those who choose by star ratings are bound to be confused by them. Never pick a fund by its stars and past 1Y or 2Y performance.
Disclosure: Not an investor in this fund or this category or funds. My equity portfolio should be at least 60% large cap.
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