The one area of the entire financial markets where the individual investor can actually have an edge on the institutional investor is small-cap stocks. - The Small-Cap Investor Why Small-Caps?
Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Small-Caps outperform in long term Small-Cap outperformance is a global phenomena India Small-Cap out-performance over Large-Cap since 2003 US Small-Cap out-performance over Large-Cap since 2000 2,600 600 2,100 1,600 1,100 16.5x 11.3x 500 400 300 200 4.5x 2.5x 600 100 100 0 S&P BSE SENSEX S&P BSE Small-Cap MSCI USA Small cap TRI MSCI USA Largecap TRI Data source: Bloomberg Data till Dec 2018. Index rebased to 100. Past performance may not be sustained in the future. 3
Stock Price Earnings Per Share Stock Price Earnings Per Share Fundamentals drive small-cap outperformance 250 200 150 100 50 0 EPS Growth Stock price Marketcap 2,406 cr. Motherson Sumi (23X) 29% cagr 48% cagr Marketcap 54,517 cr. 6 5 4 3 2 1 0 2000 1800 1600 1400 1200 1000 800 600 400 200 0 EPS Growth Stock price Marketcap 1,139 cr. IndusInd Bank (4.4X) 39% cagr 65% cagr Marketcap 70 98,709 cr. 60 50 40 30 20 10 0 motherson sumi Trailing 12M Earnings per Share indusind Bank Trailing 12M Earnings per Share Stock price are slaves of earnings Quality small-caps have shown strong earnings growth compared to their large-cap counterparts This leads to outperformance of small-caps over large-caps in the long run Data source: Bloomberg YoY 12 months trailing EPS and Price growth data till Jan 2018. Past performance may not be sustained in future. Only for illustration purpose only. The scheme may or may not invest in these stocks. 4
Number of stocks Bigger opportunity for alpha in small-caps Small-Caps are hardly covered by analysts Average number of analysts covering largecaps is 30 and mid-caps is 15. Small-caps are relatively under-researched. Out of 870 stocks in BSE Small-cap Index 210 stocks are not covered by any analyst 398 stocks are covered by less than 5 analysts This gives fund manager an edge in spotting good businesses early and generate higher alpha Data source: Bloomberg. S&P BSE Small-cap Index considered for this analysis. Data as on Dec-18 450 400 350 300 250 200 150 100 50 0 No. of Analysts Covering Stocks from BSE Smallcap Index None < 5 < 10 < 20 < 30 > 30 Number of analysts 5
AUM in Rs. Crore Demand may increase in small-caps Stock categorisation can lead to higher demand for small cap stocks Post SEBI scheme categorization investible universe has shrunk in large cap and midcap segment 200000 180000 MF Category wise AUM Only 100 stocks available in large-caps Only 150 Stocks available in Mid-caps Over 2,500 stocks available in small-caps Since the small-cap universe is large, fund managers may incrementally look forward to invest in this space As shown in the graph, potentially over 1 lakh crore can find its way into small-cap stocks MF AUM as Dec 2018. Data source ACE MF. 160000 140000 120000 100000 80000 60000 40000 20000 0 20% % of AUM that can be invested in small caps as per revised mandate 30% 35% 35% LargeCap Large&Midcap MidCap Multicap 6
Growth stories unique to small-caps Industrial/Infra Sector Chemical Companies Staffing Companies Industrial/infra sector shall do well over medium term as it is levered to acceleration in economic growth. In this sector, small-cap stocks account for 69% of companies and 27% of market cap. Mid-cap stocks account for another 23% of companies accounting for 32% of market cap. Indian chemical companies are expected to do well over medium to long term. These companies continue to gain market share from China in select product categories. 83% of listed chemical companies are small-caps accounting for 50% of market cap. Staffing services companies are growing fast and shall continue to do well in medium to long term. There is no large cap company in this sector. Two thirds of the companies (both in terms of numbers and market cap) are small-caps. Data source: Bloomberg 7
Start with acorns, wind up with oak trees. Start with oak trees, and you wont have quite the same dramatic growth. That s small cap investing. - 100 baggers: Small Cap Investing Why invest in Small-Caps?
Investing during tough times has proved rewarding Last 1 Year Return (Small Cap index) Subsequent 5 Year Average Return (CAGR) From -30% to -20% 13.7% From -20% to -10% 15.0% From -10% to 0% 14.0% From 0 to 10% 11.7% From 10% to 20% 6.7% Investing in small-caps has been rewarding when last one year returns are negative As on today Small-Cap Index is down over 28% in last one year Hence, considering past trends, we believe this may be a good time to start investing in small-caps From 20% to 30% 5.7% Data source: Bloomberg Data till Dec 2018. Past performance may not sustain in the future. Rolling return analysis done using Nifty Small Cap 250 index. 9
Quality stocks available at good prices Small-Cap stocks have fallen sharply from their peak Fall from peak % Stocks Less than 10% 4 10% to 20% 2 20% to 30% 16 30% to 50% 53 25% small-cap stocks have fallen more than 50% 53% small-cap stocks have fallen more than 30% from their peak This provides good opportunity for investing in quality small-cap stocks More than 50% 25 NSE small cap 250 index used for the above analysis. Data as on Dec-18. Data source: Bloomberg 10
History is in favour of small-caps Calendar Year Large-cap Small-cap Out Performance (small-cap Vs Large-cap) 2006 40 46 6 2007 55 95 40 2008-52 -69-17 2009 76 114 38 2010 18 16-2 2011-25 -36-11 2012 28 38 10 2013 7-8 -15 2014 31 70 39 2015-5 10 15 2016 3 0-3 2017 29 57 28 2018 3-28 -31 In past, small-caps have bounced back sharply after underperforming large-caps in the previous year. The recent underperformance by small-caps is most severe in the last 12 years. This indicates that it may be a good time to start investing in small-caps. Largecap is represented by Nifty 50, Smallcap is represented by Nifty smallcap 250 index. Data source: Bloomberg. Past performance may not be sustained in the future. Data till Dec 2018. 11
Better risk-reward in quality small-cap stocks A small-cap Industrial company Valuations looking expensive Valuations have turned attractive Better Risk - Reward scenario 1 Year ago Now 1 Year ahead Stock Price Down 25% Valuation Scenario P/E Price Change* P/E 22.4 ROE 10.2 P/B 2.3 P/E 13.1 ROE 16.9 P/B 2.2 No change in PE 13.1 20.4% Marginal increase in PE 17.8 63.1% Back to year ago PE level 22.4 105.8% Further derating in PE 10.4-4.5% Last 1 year EPS growth 29% Data source: Bloomberg. Only for illustration. Past performance may not be sustained in the future. Better upside potential with limited downside *Assuming EPS growth of 20.4% and ROE 18.1% Price change is calculated by multiplying change in PE and EPS growth. 12
Better risk-reward in quality small-cap stocks A small-cap real estate company Valuations looking expensive Valuations have turned attractive Better Risk - Reward scenario 1 Year ago Now 1 Year ahead Stock Price Down 26% Valuation Scenario P/E Price Change* P/E 23.1 ROE 7.9 P/B 1.8 P/E 14.7 ROE 9.9 P/B 1.4 No change in PE 14.7 7.8% Marginal increase in PE 18.9 39.0% Back to year ago PE level 23.1 70.3% Further derating in PE 12.0-12.0% Last 1 year EPS growth 16.9% Data source: Bloomberg. Only for illustration. Past performance may not be sustained in the future Better upside potential with limited downside *Assuming EPS growth of 7.8% and ROE 10.1%. Price change is calculated by multiplying change in PE and EPS growth. 13
Better risk-reward in quality small-cap stocks A small-cap NBFC Valuations looking expensive Valuations have turned attractive Better Risk - Reward scenario 1 Year ago Now 1 Year ahead Stock Price Down 25% Valuation Scenario P/E Price Change* P/E 32.7 ROE 5.5% P/B 1.8 P/E 13.5 ROE 10.7% P/B 1.4 No change in PE 13.5 48.5% Marginal increase in PE 23.1 154.8% Back to year ago PE level 32.7 261.2% Further derating in PE 9.5 4.8% Last 1 year EPS growth 82% Data source: Bloomberg. Only for illustration. Past performance may not be sustained in the future Better upside potential with limited downside *Assuming EPS growth of 48.5% and ROE 14%. Price change is calculated by multiplying change in PE and EPS growth. 14
Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Monthly returns in % Small-Caps are volatile Small-caps are even more volatile during bear cycle Hence, it is prudent to invest in a staggered way and reduce timing risk 50 Small Cap month on month absolute returns 40 30 20 10 0-10 -20 Bear cycles in small caps -30-40 -50 Data source: Bloomberg. Base Date for Nifty Small Cap 250 Index is April 2005. Data as on Dec 2018 16
Small-Caps in small STePs Small-caps have corrected Small-cap index has corrected by over 28% in last one year..but predicting bottom is difficult While small-cap stocks may have started looking attractive, no one can predict the bottom as sentiments can drive down prices further Volatility may continue.. Key macro factors like crude price, interest rates and elections can drive prices either way in next six months Invest in Edelweiss Small-cap Fund in a staggered way through STeP facility to reduce timing risk Data source: Bloomberg. Data for Nifty Smallcap 250 index as on Dec 2018. 17
Edelweiss Small cap Fund + STeP facility It s better to take many small steps in the right direction than to make great leap forward only to stumble backward. Trigger enabled Under this facility 20% of the application money will be invested upfront in Edelweiss Small Cap Fund Plan Remaining 80% will be invested in Edelweiss Liquid Fund and will switch to Edelweiss Small Cap Fund in 4 equal monthly instalments on market dips Smart Through STeP facility investors can spread their investment in Edelweiss Small Cap Fund in 5 equal monthly instalments 18
Illustration of STeP facility Please read detail terms and conditions for STeP facility on slide number 32 19
Investment options in Edelweiss Small Cap Fund NFO Application Lumpsum Investment Long Term SIP One time purchase STeP Facility 20% purchase into Small cap Fund NFO Invest 80% in four equal monthly instalments 20
About Edelweiss Small Cap Fund Investment Strategy Asset Allocation Invests in small-cap companies that are Compounding stories with reasonable growth prospects High quality businesses with strong return ratios Operating in niche environment Eye on quality - higher degree of due diligence Small caps 65% to 100% into Equity and Equity related securities of Small-Cap companies Other Equities 0% to 35% into Equity and Equity related securities of other companies Aim to benefit from both sources of return Compounding of earnings Valuation re-rating Fixed Income 0% to 35% into debt and money market instruments 21
Unique Portfolio Allocation Strategy Portfolio is defined under 4 different buckets to ensure consistency in performance Strategic Allocation (Core Portfolio) Buy and hold approach Compounding Businesses Proven track record over long period Structural growth story with a high quality business & management Tactical Business in cyclical industry Well Levered to the upturn Bought and sold depending on the phase of the cycle and valuations Option Business offering potentially Large scale-up opportunity Typically has a higher degree of risk Have a 1 or 0 kind of a payoff Defensive It is a position that is more of a defensive posture Protecting from any probable market underperformance 22
Risk Mitigants Liquidity : Eye on liquidity of the underlying portfolio to reduce impact cost of investing Diversification : Well diversified portfolio to mitigate concentration and liquidity risk Quality : Stringent due diligence and eye on quality of management and earnings Risk comes from not knowing what you re doing. Warren Buffet 23
Who should invest? Patience : Investors who want to invest for more than 5 years and can be patient during volatile markets Risk Appetite : Investors who have higher risk appetite and want aggressive portfolio allocation Asset Allocation : Investors who are looking to invest in small-caps as a part of asset allocation Investing is the intersection of economics and psychology. Seth Klarman 24
Process oriented investment approach Selectivity, scrutiny, high conviction Focused portfolios Independent Stock position Understanding sources of returns Earnings progression Valuation changes Dividend Expected return Incorporating new information & stock ideas Resizing the bets Risk assessment Sizing the bets Probabilistic approach Classification: Strategic Tactical Defensive Option Scoring: Business Management Growth Valuations Circumstances Focus on total sectoral active exposure & diversification Liquidity 25
In-depth research using multiple factors 26
Experienced Fund Manager Harshad Patwardhan - CIO, Equities An IIT/IIM, CFA charter with 25 years of industry experience. 12 years experience on the sell side with various MNC brokerage firms and has been a rated research analyst by several large & prominent FIIs. He believes that the first-hand experience of covering stocks/sectors and interacting with experienced fund managers has been extremely valuable for his investment management career. Harshad was the CIO Equities at JPMorgan Asset Management for over a decade and continued as the CIO Equities of Edelweiss Asset Management after the schemes changed hands in the year 2016. 27
Fund Manager performance Edelweiss Midcap Fund 10 year performance Some successful stock picks in Edelweiss Midcap fund 100 90 80 70 60 50 40 30 20 10 0 Edelweiss Midcap Fund Fund 21.8% cagr BM 18.4% cagr Nifty Midcap 100 - TRI Stock 5 Year Return (Abs) Growth in multiples Action Construction 582% 6.82X Whirlpool of India 535% 6.35X Solar Industries 483% 5.83X Gruh Finance 404% 5.04X Havells India 324% 4.24X Sadbhav Engineering 129% 2.29X Only for illustration purpose. These stocks were/are actual holdings in Edelweiss Midcap Fund which has been managed by Harshad Patwardhan since the inception of the fund. Performance as on Dec 2018. Past performance may not be sustained in the future. 28
Fund Manager performance Scheme Benchmark Nifty Midcap 100 TR Index Additional Benchmark Nifty 50 TR Index Period Returns* Value of 10,000 Invested Returns* Value of 10,000 Invested Returns* Value of 10,000 Invested 1 Year -12.34% 8,766-11.17% 8,883 7.82% 10,782 3 Year 9.16% 13,012 11.00% 13,679 12.54% 14,260 5 Year 22.61% 27,742 19.24% 24,132 13.37% 18,742 Since Inception 8.83% 25,231 7.81% 22,754 6.74% 20,408 Past performance may or may not be sustained in future and should not be used as a basis for comparison with other investments. * CAGR Return. Value in - Different plans shall have different expense structure. The performance details provided herein are of Regular Plan of Edelweiss Mid Cap Fund. Returns are for Growth Option only. Since Inception returns are calculated on Rs. 10/- invested at inception of the scheme. In case the start/end date is non business day, the NAV of previous day is used for computation. - The scheme is currently managed by Harshad Patwardhan (managing this fund since its inception). Data Source: Ace MF, Data as on 30 th Nov 2018 In case the start/end date is non business day, the NAV of previous day is used for computation. Please click on http://edelweissmf.com/download/factsheet.aspx for performance of other funds managed by fund manager. 29
Fund Features Fund Structure An open ended scheme predominantly investing in small cap stocks NFO Period 18th Jan 2019 to 1st Feb 2019 Exit Load Scheme Re-opens for continuous sale and repurchase on or before February 14, 2019 If the Units are redeemed / switched out on or before 365 days from the date of allotment 1.00% If the Units are redeemed / switched out after 365 days from the date of allotment Nil MICR Cheques Till end of business hours on Feb 1, 2019 RTGS and Transfer Cheques Till end of business hours on Feb 1, 2019 Switches Plans and Options Switches from equity schemes and other schemes Feb1, 2019; Till cut off time (specified for switch outs in the source scheme) Direct and Regular Plan with Growth and Dividend Payout & Sweep Minimum Application Amount Rs.5,000/- (plus in multiple of Re. 1) Fund Manager Benchmark Harshad Patwardhan Nifty Small cap 250 TR Index 30
When investors in general are too risk-tolerant, security prices can embody more risk than they do return. When investors are too riskadverse, prices can offer more return than risk - Howard Marks Many investors today have become risk-adverse in small caps!
Terms & Conditions for STeP facility Smart Trigger enabled Plan ( STeP ) is a unique feature that enables investors to invest in the Edelweiss Small Cap Fund ( the Scheme ) in a staggered manner. You can opt for this facility only during the New Fund Offer (NFO) Period.Minimum Investment amount under the STeP facility is Rs. 25000/-. Investment for an amount of less than Rs. 25000/- will not be eligible for the STeP facility and will be considered under the Lump Sum purchase option. Through STeP Facility investors can spread their investments equally over 5 monthly instalments, wherein the initial 20% of the investment amount will be considered upfront in the NFO of the Scheme and the remaining 80% will be invested under Edelweiss Liquid Fund - Growth Option as per the NAV applicable on the date of allotment of Edelweiss Small Cap Fund. Post the closure of the NFO of the Scheme, the amount invested under Edelweiss Liquid Fund shall be switched into Edelweiss Small Cap Fund in 4 equal monthly instalments which will be triggered on the basis of 3% fall in the Nifty Small Cap 250 Index on a monthly basis which will be calculated based on the value of the index on the date of initial allotment. Please refer to the illustration table below for more information. In case the above trigger does not occur in a month, 20% of the amount invested during the NFO period will be switched to Edelweiss Small Cap Fund on the last business day of the month. Only one Switch will be triggered in a month. In case of the last instalment under the STeP facility, the entire balance units available in Edelweiss Liquid Fund will be switched in line with points 4 & 5 above. Units will be allotted in Edelweiss Small Cap Fund at the applicable NAV prevalent on the date of Switch. A new folio will be opened for all investments received under the STeP Facility. In case of redemption of units under Edelweiss Liquid Fund during the tenure of the STeP facility, the amount / number of instalments to be switched would stand reduced to the extent of the amount redeemed or in case of full redemption, the facility will be discontinued. 32
Disclaimer 33
Disclaimer Mutual fund investments are subject to markets risks, read all scheme related documents carefully Disclaimer: This document has been prepared by Edelweiss Asset Management Limited (Edelweiss AMC) based on internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Sector(s) / Stock(s) / Issuer(s) mentioned above are for the purpose of explanation and should not be construed as recommendation. The fund manager(s) may or may not choose to hold the stock mentioned, from time to time. Investors are requested to consult their financial, tax and other advisors before taking any investment decision(s). The information/ data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The same should not be construed as investment advice to any party. The statements contained herein are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Neither Edelweiss Asset Management Limited (Edelweiss AMC) and Edelweiss Mutual Fund (the Fund) nor any person connected with them, accepts any liability arising from the use of this document. Edelweiss Mutual Fund/AMC is not guaranteeing returns on investments made in this scheme. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein. Past performance may not be sustained in the future. 34