Small Caps To Be Back In Vogue In 2020, Says The Portfolio Manager With Best Returns In December

“Small caps became untouchables after the NBFC crisis in 2018, and investors didn’t want any stock if its threshold is below a certain level even if the management is clean, there’s no debt on balance sheet and valuations are reasonable,” Amit Doshi, investment director at Care Portfolio Managers, told BloombergQuint over the phone.

The S&P BSE Small Cap Index fell 23.53 percent in 2018 and 6.85 percent in 2019, while the benchmark Sensex gained 5.91 percent and 14.38 percent, respectively, as investors took refuge in safer and liquid large caps during uncertainty.

Doshi’s portfolio, 70 percent of which comprises small and mid caps, declined 5.6 percent in three months ended December and tumbled 19.5 percent in 2019, respectively. Assets contracted to about Rs 214 crore as of December from Rs 319 crore two years earlier.

His portfolio, however, rose 3.98 percent in December, recording the best performance among peers. That came on the back of a rally in small caps—the BSE gauge tracking such stocks has risen for four straight months.

Now with a huge valuation gap between large and small caps, there is a realisation to move towards stock-specific investment in small caps where significant price erosion has taken place despite strong financials, Doshi said.

Small caps were ignored for the last two years but now investors are trying to come back to cash-generating companies in the segment, said Doshi.

Large-cap resistance is building up on account of stock valuations, Doshi said, adding till the time economic growth doesn’t return, the story would be about stock-specific movement where the new money will go into small and mid caps. Money will shift to companies with good corporate governance, balance sheet and valuations, he said.

Care Portfolio Managers, which caters to 680 clients with a third of them non-resident Indians mainly from the Gulf countries, has the largest exposure to the paper industry. Nearly a fourth of its portfolio is invested in companies including JK Paper Ltd., Seshasayee Paper & Boards Ltd. and Yash Paper Ltd. It also has exposure to chemical, pharma and health and textiles companies.