Mimicking fund managers of no use to investors

The Nifty Smallcap 250 index is trading at a PE of 100-plus, which implies investors are looking for a doubling of earnings within a year. While individual businesses, especially small businesses starting from a low base, can double earnings within a year, it is utterly impossible for a batch of 250 companies spread across multiple sectors to do this.

Calculating backwards using the NSE data, earnings for this set of 250 companies have actually grown by 10 per cent between April 2016 and February 2018. That compounds out to just over 5 per cent per annum. An EPS growth rate of 5 per cent versus a PE of 100 is deep in bubble territory.

A lot of small-cap action has been driven by retail investors. But, the real push came from institutional interest. While small caps are not so often traded by FPIs (foreign portfolio investors), there has been a lot of domestic institutional interest and fund buying.

Value Research recently released a list of small caps that have attracted most fund buying by an analysis of portfolio holdings between December 2016 and December 2017. Let us have a quick look at that "most bought list". Note that the Value Research list covered fund data between December 2016 and December 2017. If we compare that to 1year returns in late February 2018, we should get a sense of possible changes in attitude between December 2017 and February 2018. As a benchmark, the Nifty Smallcap 250 is up by 23 per cent in the past year (February 2017-February 2018).

Somany Ceramics saw steady appreciation through 2017, rising from around ~600 to ~950 in early January 2018. The stock has since collapsed back to ~648, yielding just a return of 6 per cent in the last 12 months. The trigger for selloffs was poor quarterly results.

Mahindra Holiday & Resorts was another heavily bought stock. There was a 1:2 bonus in July 2017, which must have pleased investors. However, the return in the last year is just 1 per cent if we adjust prices for the bonus. Thyrocare Technologies, the path lab and diagnostic chain was another hot stock that funds bought through 2017. The one-year return as of February 22, 2018, is minus 10 per cent.

Just Dial was another hot stock. The local search engine saw a lot of buying interest in 2017, including from FPIs. In late January, Indus Fund of Mauritius sold heavily. The 1year return is minus 15 per cent. Nilkamal, maker of moulded plastic furniture, was another fund favourite. The 1-year return is minus 9.6 per cent.

It is not all bad news Brigade Enterprises, the real estate developer from Bengaluru, saw 65 per cent capital appreciation in the last year. Apar Industries, manufacturer of engineering products, has seen appreciation of about 5 per cent in the last year. Srikalahasti Pipes is up about 9.5 per cent. Ashoka Buildcon has capital appreciation of 25 per cent. Tamil Nadu Newsprint has a return of 5 per cent in the last year.

Taking the top ten of the most bought holdings, three stocks have seen capital losses, two have beaten the benchmark index return and five have yielded single-digit positive returns. An unweighted average return would be around 8.3 per cent. The two outperformers are Ashoka Buildcon, which is a construction and project engineering firm, and Brigade Enterprises.

The share price moves suggest probable reduction of exposures to such stocks when the funds release their March 2018 portfolios. It also suggests that the strategy of mimicking fund portfolios might not be very useful for the direct equity investor.