Canara Robeco Small Cap Fund: Delivering Strong Growth through Diversification

If you are an investor with a high risk appetite and are looking to multiply wealth at a greater pace, then Small Cap Funds are a good fit for your portfolio. The trailing P/E of the Nifty Smallcap 250 index is currently at around 17x -- down from the COVID-19 peak -- while the MSCI India Small Cap index 12-month forward P/E is around 19x, also down from the historical peak. Therefore, there appears to be a decent margin of safety. This makes it an opportune time to invest in Small Cap Funds.

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Canara Robeco Small Cap Fund is a well-managed Small Cap Fund that has built a superior track record within a short time span.

Past performance is not an indicator of future returns
April 18, 2023
(Source: ACE MF)

Canara Robeco Small Cap Fund has built a commendable track record within a short time span and stood strong among its large-sized peers. In the last 1-year period though the fund has trailed many of its peers, it has outpaced the benchmark returns. Over the longer 2-year and 3-year time periods, Canara Robeco Small Cap Fund has outperformed the benchmark by 8.5-16.5 percentage points in CAGR and stood among the top quartile performers in the category. With this, Canara Robeco Small Cap Fund has handsomely rewarded its investors.

This outperformance has come at a reasonable level of risk. The fund's standard deviation is much lower than the benchmark but is nearly in line with the category average. Meanwhile, the fund's Sharpe Ratio of 0.56 is currently the best in the category and clearly outpaces that of the benchmark.

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Investment strategy of Canara Robeco Small Cap Fund

Categorised as a Small Cap Fund, Canara Robeco Small Cap Fund is mandated to invest a minimum of 65% of its assets in stocks of small-sized companies, i.e. companies ranking 251st onwards in terms of market capitalisation. It has the flexibility to invest up to 35% in stocks of mid-cap and large-cap companies. The fund aims to maintain a diversified portfolio at all times. It targets high-quality small-cap businesses that are undervalued and have a sustainable business model, consistent earnings, competent management, and good governance. Given the highly volatile nature of small-cap investment, the fund aims to adopt a strong investment process to complement risk management. The fund had a low turnover ratio of less than 10% in the last one year, signifying the conviction the fund manager has in each of its bets.

As of March 31, 2023, Canara Robeco Small Cap Fund held a large portfolio of 81 stocks. The top 10 stocks form 20.7% of its assets and consists a good mix of different sectors. The fund has limited allocation to each stock to under 3% due to the liquidity risk associated with small-cap stocks. KEI Industries, Cera Sanitaryware, Equitas Small Finance Bank, Ultratech Cement, and Multi Commodity Exchange of India are currently part of the fund's prominent holdings. Canara Robeco Small Cap Fund has a long tail of around 32 stocks having an allocation of less than 1%.

Canara Robeco Small Cap Fund has benefitted the most from its holdings in Scaheffler India, KPR Mill, Persistent Systems, RHI Magnesita India, VRL Logistics, Grindwell Norton, and Timken India, that have more than doubled in value in the last two years. The Great Eastern Shipping Company, Ahluwalia Contracts, Fine Organic Industries, NALCO, TCI Express, and EID Parry (India) were among the other contributors to its gains.

Canara Robeco Small Cap Fund's portfolio is spread across 22 sectors. The fund has higher exposure to the Banking & Finance and Engineering sectors that collectively form 34.3% of its assets. Consumption and Construction are the other core sectors, while it also holds substantial allocation to Cement, Retailing, Pharma, Chemicals, Infotech, Transportation, Auto Ancillaries, and Power.

Suitability

Canara Robeco Small Cap Fund has benefited by investing in high growth-oriented stocks but at the right valuations. The superior stock-picking strategy has helped it identify the right stocks and outpace the market and many of its peers across time periods. It maintains a well-diversified portfolio spread across a range of stocks and sectors to mitigate the risk.

Canara Robeco Small Cap Fund is managed by an experienced fund manager, Mr Shridatta Bhandwaldar, who has been associated with the fund house for many years now and manages some of the top-performing schemes at the AMC. The fund does not resort to taking aggressive calls for extraordinary returns but maintains a diversified portfolio of quality stocks with a long-term view. This strategy of the fund house has enabled it to keep the risk under control and perform well even in uncertain market conditions.

Canara Robeco Small Cap Fund is suitable for investors with a high risk appetite and an investment horizon of at least 5-7 years.

Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

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