This document provides an overview and analysis of the IDFC Emerging Businesses Fund, a small cap equity fund. It discusses 4 reasons to invest in small caps now: 1) small caps are the most beaten down segment currently, 2) small caps show emerging signs of value compared to large caps, 3) shrinking trading volumes indicate the market may be nearing bottom. It also outlines 4 reasons to invest in small caps generally: exposure to niche opportunities, potential for future large caps, ability to select from a broad range, and potential for alpha from active management. The document reviews the fund's current positioning and top sectors.
5. 5
Stock Selection Process – Quality & Growth
QUALITY GROWTH
Cash
Generating
Superior
Return on
Capital
Ability
to repay
Debt Medium
term growth
visibility
&
6. 6
Managing Risks
*This would however depend on market conditions at the time of investment. Asset allocation and investment strategy will be as per provisions of Scheme Information Document
RISK
MITIGATION
Liquidity
Drawdown
Governance
Top 10 stocks <45% of Net
Assets*
Diversified Portfolio of Stocks*
Gradual scaling up of positions
will help reduce the impact of
adverse incidents
7. 7
About IDFC Emerging Businesses Fund
3 Reasons to Invest Now
4 Reasons To Invest in Small Caps
8. 8
Price, Valuation and Volume indicate an attractive Entry Point
Small cap index has
seen a significant
correction
Valuations for Small
Caps as compared to
Large Caps are
reasonable to
attractive
Small Cap index
volumes tend to peak
out as market peaks
and vice versa;
current volumes for
Small Caps are closer
to down-cycle levels
PRICE VALUATION VOLUME
9. 9
Reason 1: Still Small Caps are currently the most beaten down Segment
Source: Bloomberg, performance for total return index rebased to 1000
Data as on 31st August 2020
1,087
902
699
400
500
600
700
800
900
1,000
1,100
1,200
1,300
Jan-18
Feb-18
Mar-18
Apr-18
May-18
Jun-18
Jul-18
Aug-18
Sep-18
Oct-18
Nov-18
Dec-18
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Aug-19
Sep-19
Oct-19
Nov-19
Dec-19
Jan-20
Feb-20
Mar-20
Apr-20
May-20
Jun-20
Jul-20
Aug-20
S&P BSE 100 Index S&P BSE 150 Mid cap Index S&P BSE 250 Small cap Index
Significant gap between Large Cap and Small Cap index
Absolute Returns
S&P BSE 100
Index
S&P BSE 150 Mid Cap
Index
S&P BSE 250 Small Cap
Index
Since 01st Jan 2018 9% -10% -30%
10. 10
Small Cap as a % of Large Cap Market Cap near Inflection
Source: Bloomberg, Data for S&P BSE 250 small cap versus S&P BSE Sensex
Past performance may or may not be sustained in future.
Data as on August 2020
Current levels are closer to the levels seen in the previous down cycles from where they have mostly rebounded
14%
14%
20%
10%
20%
19%
13%
5%
10%
15%
20%
25%
Dec-05
Aug-06
Apr-07
Dec-07
Aug-08
Apr-09
Dec-09
Aug-10
Apr-11
Dec-11
Aug-12
Apr-13
Dec-13
Aug-14
Apr-15
Dec-15
Aug-16
Apr-17
Dec-17
Aug-18
Apr-19
Dec-19
Aug-20
Market Cap of Small Caps as % of Large Caps
11. 11
Reason 2: Small Caps show emerging signs of Value v/s Large Cap
Source: Bloomberg, PE: Price to Earnings
Data as on August 2020
Small Cap index PE is available at a discount to its historical average PE
Positive
PE
22.9
15.6
0
5
10
15
20
25
30
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Aug-16
Nov-16
Feb-17
May-17
Aug-17
Nov-17
Feb-18
May-18
Aug-18
Nov-18
Feb-19
May-19
Aug-19
Nov-19
Feb-20
May-20
Aug-20
S&P BSE 100 Index S&P BSE 250 Small cap Index Average Smallcap PE
Average Positive PE of Small cap index: 17.0
12. 12
Small Cap valuation is at a discount to Large Cap
Source: Bloomberg
Data as on August 2020
Average Discount : -17%
Small Cap index PE is trading at 2X discount to its average
15.6
22.9
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
0
5
10
15
20
25
30
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Aug-16
Nov-16
Feb-17
May-17
Aug-17
Nov-17
Feb-18
May-18
Aug-18
Nov-18
Feb-19
May-19
Aug-19
Nov-19
Feb-20
May-20
Aug-20
Discount
to
Large
cap
(%)
Positive
PE
Discount, when more than historical average (RHS,%) S&P BSE 250 Small cap Index
S&P BSE 100 Index Average Discount to Large cap (RHS)
Average Discount : -17%
13. 13
Start Date End Date Phase Duration (Days)
Start Date
Volume
End Date
Volume
% Change Index Return
Apr-07 Jan-08 Bull 254 28.7 97.8 241% 81%
Jan-08 Dec-08 Bear 349 97.8 30.8 -69% -70%
Dec-08 Feb-10 Bull 427 30.8 139.8 354% 123%
Feb-10 Aug-13 Bear 1,267 139.8 36.5 -74% -37%
Aug-13 Feb-18 Bull 1644 36.5 112 207% 201%
Feb-18 Mar-20 Bear 781 112 40.2 -64% -55%
Mar-20 Aug-20 Bull 161 40.2 50 24% 62%
Reason 3: Shrinking Volumes typically indicate Market nearing Bottom
Source: Bloomberg, S&P BSE 250 small cap Index
Volume in million
Data as on August 2020
Small Cap index volumes have started to recover
14. 14
About IDFC Emerging Businesses Fund
3 Reasons to Invest Now
4 Reasons To Invest in Small Caps
15. 15
Diagnostic
services
E.g. Dr. Lal
Pathlabs
Specialty
Chemicals
E.g. Deepak Nitrite
Textiles
E.g. Vardhaman
Textiles
Building
materials
E.g. Kajaria
Ceramics
Media
E.g. Entertainment
Network
Digital
E.g. Just Dial
Illustrative:
Unique Segments
in the Small
Cap Index
Reason 1: Benefit from Niche Opportunities
The sectors/stocks mentioned herein are only for illustrative purposes and should not be construed as a recommendation from IDFC Mutual Fund or indicative portfolio of any scheme of IDFC Mutual Fund. IDFC Mutual Fund may or may not hold
any position in these sectors/stocks. Performance of the above sectors/stocks should not be construed as indicative yield of any of the schemes of IDFC Mutual Fund. Portfolio of the fund would depend on asset allocation and investment strategy
as stated in Scheme Information Document and market conditions at the time of investment.
Participate in emerging businesses, unavailable in the large cap space
16. 16
Reason 2: Small Caps may be the Leaders of Tomorrow
Data as on 31 Aug 2020. Source: Bloomberg, Market capitalization data in INR cr; Images are not to scale
The sectors/stocks mentioned herein are only for illustrative purposes and should not be construed as a recommendation from IDFC Mutual Fund or indicative portfolio of any scheme of IDFC Mutual Fund. IDFC Mutual Fund may or may not
hold any position in these sectors/stocks. Performance of the above sectors/stocks should not be construed as indicative yield of any of the schemes of IDFC Mutual Fund. Portfolio of the fund would depend on asset allocation and
investment strategy as stated in Scheme Information Document and market conditions at the time of investment.
Participate in the high-growth opportunities of future blue chips
2008 Today
NBFC Bajaj Finance
Footwear
Auto Ancillaries
Leisurewear/
Innerwear
1,562 2,10,157
1,807 16,696
249 8,986
539 21,179
Bata
Minda Industries
Page Industries
Market Cap Expansion
17. 17
Reason 3: Actively managed Small Cap Funds have beaten Benchmark
Performance (CAGR) 1 Year 2 Years 3 Years 5 Years 7 Years 10 Years
Category Average (Small cap funds) % 12.3 -5.7 -1.5 6.6 18.7 10.7
S&P BSE 250 Small Cap Index TRI % 8.0 -10.7 -6.1 4.4 13.1 3.5
Best Return (Category) % 34.3 6.0 7.8 12.9 25.7 17.6
Worst Return (Category) % -1.7 -14.2 -8.3 1.8 11.7 6.4
Alpha % 4.3 5.0 4.6 2.1 5.6 7.2
Source: MFI (All funds as per SEBI defined category of Small cap fund, except one fund in the category which was repositioned from a debt fund)
Past performance may or may not be sustained in future.
Schemes are compared to a common small cap index, i.e. S&P BSE 250 Small Cap Index TRI
Data as on 31 August 2020
Professional management has consistently delivered alpha in this category
18. 18
Source: SEBI Circular on Categorization and Rationalization of Mutual funds, dated October 6, 2017 and December 4, 2017.
The market capitalization is subject to change on half yearly basis.
LARGE CAP
(Top 100 stocks)
MID CAP
(101st - 250th stocks)
SMALL CAP
(251st Stock to 500th Stocks)
Reason 4: Small Caps offer the Widest part of the Market
Opportunity
Opportunity to select from a broad range of sectors and companies
S&P BSE 500
Over 500 other companies to choose from
+
19. 19
A Quick Recap
o Significant price correction
o Attractive valuation v/s Large cap
o Lower volumes indicate market nearing
bottom
Why Now
Portfolio
Construct
o Buy & Hold + Opportunistic + IPOs
o Quality + Growth
o Emphasis on risk management
o Participate in niche opportunities
o Buy the potential leaders of tomorrow
o Active management adds alpha
o Access to broader markets
Why invest
in Small
Caps
20. 20
WHO SHOULD
INVEST?
Investors looking for
opportunities in Niche or
Unique segments
Investors looking to
identify the possible
Large Caps of
Tomorrow
Investors seeking fund with High Return
Potential (albeit with higher risks)
Who should Invest?
Suitable for investors with high risk appetite and a long investment horizon;
not for 1st time/conservative investors
21. 21
Current Portfolio Allocation
Small Cap,
69.3%
Mid Cap, 11.1%
Large Cap, 7.3%
Cash,
12.3%
Portfolio split
Commodities, 24.0%
Auto, 10.7%
Consumer
Staples, 10.3%
Consumer
Discretionary,
8.7%
Cement / Building Mat,
8.2%
Top 5 sectors – Small Cap segment
Data as on 31st August 2020
Source: Bloomberg
22. 22
How is the Fund positioned currently?
Data as on 31st August 2020
Source: Bloomberg
❑ For the near term, an uplift in rural economy is being played through exposure in Agro-chemicals, Auto,
especially tractors and rural focused consumer staples.
❑ Industrials and Information Technology are the two sectors with the highest underweight position in the fund.
❑ Going forward, the recovery in Financials may lag other segments of the markets. Hence, the sector weight
would be static or reducing unless there is some positive news on the medical front.
23. 23
Fund Detail
Small Cap Fund – An open ended
equity scheme predominantly
investing in small cap stocks
Fresh Purchase - Rs.5000/- & in
any amount thereafter
S&P BSE 250 Small Cap TRI
1% if redeemed/switched
out within 1 year from the
date of allotment
Nature
Minimum
Application Amount
Benchmark Exit Load
Mr. Anoop Bhaskar
Fund Manager*
*Mr. Viraj Kulkarni is the dedicated fund manager for overseas investments of the scheme.
Rs. 646.57 Crores
Month End AUM
Data as on 31st August 2020
24. 24
Disclaimer:
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency about the investment strategy / theme of the Scheme and should
not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any
security. This document has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of IDFC Mutual Fund. The
information/ views / opinions provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account
before interpreting this document. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an
investment decision and the stocks may or may not continue to form part of the scheme’s portfolio in future. The decision of the Investment Manager may not always be profitable; as
such decisions are based on the prevailing market conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends. This
information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement as may be required from time to time.
Neither IDFC Mutual Fund / IDFC AMC Trustee Co. Ltd./ IDFC Asset Management Co. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect,
incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.
This product is suitable for investors who are seeking*:
• To create wealth over long term
• Investment in equity and equity related instrument of small cap companies
*Investors should consult their financial advisers if in doubt about whether the
product is suitable for them.
IDFC EMERGING BUSINESSES FUND
(Small Cap Fund – An open ended equity scheme
predominantly investing in small cap stocks)