How SBI MF's R Srinivasan made big gains for smallcap fund investors

SBI Small Cap Fund's consistent performance is a result of the fund manager's endeavour to find good businesses run by competent people at reasonable prices

Between the first and second Covid-19 waves, three people from SBI Mutual Fund — including the small-cap fund manager — drove to Hyderabad to check out a business for investment. “Thanks largely to the conviction we gained from that visit, we ended up making significant gains on that stock,” says R Srinivasan, chief investment officer-equity, at SBI Mutual Fund, known for his skill in picking mid-caps and small-caps.

Srinivasan manages SBI MF’s Small Cap fund, which has consistently outperformed the benchmark and its peers. Based on the past one-year and three-year performance of the scheme, Srinivasan is the Business Standard Fund Manager of the Year 2022 in the Equity (Mid- and Small-Cap) category.

Srinivasan says he has no secret or unique approach towards fund management. “We run a bottom-up approach to stock-picking in this fund. The basic philosophy is quite cliched. We try to buy a good business run by competent guys at a reasonable price,” he says.

It is far from the simple task it seems. “The devil lies in the details — as in what constitutes a good business model and assessing management competence — and this is where the strength and quality of our research team and the persistence of our investment process plays a large role,” Srinivasan explains.

Owing to the hard yards put in during research, SBI Small Cap Fund was able to identify some multi-baggers in the post-Covid period early on. The stocks that contributed the most to the scheme’s returns in the last three years are Dixon Technologies, Elgi Equipments, Rajratan Global Wires, Indostar Capital and Vedant Fashions. The ones that did not do well are Engineers India, Rossari Biotech, GE T&D India, Star Cement and City Union Bank.

Srinivasan points out that even some of the non-performers can do well in the future, as investments in small-cap funds are made with an investment perspective that is much longer than three years. A case in point here is Rajratan Global Wires, which was flat for more than three years before shooting up multi-fold.

According to Srinivasan, the biggest risk in managing a small-cap fund is the risk of wrongly evaluating a business or its management. The second major risk is the lack of liquidity.

Owing to this liquidity concern, SBI Small Cap fund stopped accepting lump-sum inflows in 2015. The scheme is the second biggest in its category, with assets under management (AUM) of more than Rs 15,000 crore.

This restriction on inflows helped the fund perform consistently. “We’ve had the advantage of size in this fund during the initial period, and the fact that we stopped taking bulk inflows probably helped us later on. Also, as a house, we do not shy from committing resources to this space despite the inability to size them up as a percentage of our AUMs,” says Srinivasan.